tag:blogger.com,1999:blog-73039013622018423972024-03-06T05:33:17.372+01:00Russia Economy WatchUnknownnoreply@blogger.comBlogger105125tag:blogger.com,1999:blog-7303901362201842397.post-89477050481955840592009-12-04T13:21:00.007+01:002009-12-04T14:37:39.353+01:00Russia's Economy Slows In NovemberAs <a href="http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aMzKBq0lD89g">doubts grow</a> that in the post Dubai world Russia's central bank will be able to sustain a great deal of momentum in its ongoing programme of interest rate reductions, we learn this week that the pace of expansion in Russia's economy slowed back in November, following two months of steady advance in September and October. This time services activity also weakened its advance while manufacturing activity registered its second month of contraction. Yet the central bank may well show increasing restraint in lowering interest rates, even as the economy slows, the ruble rises, and bank retail lending continues to fall, having declined for nine consecutive months up to and including October, while corporate lending dropped for a second month in a row and hasn’t risen for six months (for more on the particular topic see my recent post - <a href="http://russiatooat.blogspot.com/2009/11/russias-consumers-get-carried-onwards.html">Are Russia's Consumers Getting "Carried Away" With Themselves?</a>). <br /><br />While the seasonally adjusted VTB Capital Total Activity Index remained in positive territory for the fourth month running in November, the latest figure of 52.8 indicated the weakest rate of growth in three months.<br /><br /><br /><p><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgvC2jbN6Q9zVQMPMuzKeBv5-ec59TLF6Z5CdTm5r4A5Ifop7A9OL-RU9vA9yKkNCze4edpltpt7QAUbGb179L6uoKSWEE4V2_MskaDHP3JUplsYYa67dtV9BdJ3ccSshLVFXOhIGOFuYeS/s1600-h/GDP+indicator+3.png"><img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 241px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5411359106996274402" border="0" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgvC2jbN6Q9zVQMPMuzKeBv5-ec59TLF6Z5CdTm5r4A5Ifop7A9OL-RU9vA9yKkNCze4edpltpt7QAUbGb179L6uoKSWEE4V2_MskaDHP3JUplsYYa67dtV9BdJ3ccSshLVFXOhIGOFuYeS/s400/GDP+indicator+3.png" /></a><br /><br />The VTB Capital Monthly GDP Indicator, based on the PMI surveys for both the manufacturing and service sectors, continued to show an annual economic contraction in November, even if the the rate of decline eased for yet another month. At an annual minus 2.5%, down from a revised minus 4.0% in October, the indicator stood at its highest level since December 2008. Over the third quarter as a whole, the GDP Indicator suggested that the economy contracted by a revised 8.7% year-on-year, a better outcome than the record 9.9% fall posted during Q2. Data for the first two months of the final quarter show an average contraction of 3.3%.<br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh70AlG8BwccokAHYcmef1qrgEiJMo1b9lrCVDOaEDfDkHEqht3j9QUSV5y7ROyHlVO6qtSzegatnDsxL1oQ4wpSQK9Pqtd365CjY6nLlyi-X40ugnZBkh4NCR4aHJb7fOOLAwXJrOI84CR/s1600-h/GDP+indicator+2.png"><img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 244px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5411363072344891746" border="0" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh70AlG8BwccokAHYcmef1qrgEiJMo1b9lrCVDOaEDfDkHEqht3j9QUSV5y7ROyHlVO6qtSzegatnDsxL1oQ4wpSQK9Pqtd365CjY6nLlyi-X40ugnZBkh4NCR4aHJb7fOOLAwXJrOI84CR/s400/GDP+indicator+2.png" /></a><br />By contrast the quarter-on-quarter rate slipped back to a bare 0.2%, treacherously close to the dividing line between contraction and expansion.<br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhqvKhKPS8deNYizLXuRiid21vs9EXoa9cPRp9_YV7xeJvJnNvIav-hokK265vQngd-c2tZAcGJRIHpBAE1QmVkFxnL3CwxnTkgaenRC91hCGG7oAHnH9OdgQUnG9E81rTIDAwVz7tc6M6x/s1600-h/GDP+Indicator+One.png"><img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 245px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5411363595830574578" border="0" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhqvKhKPS8deNYizLXuRiid21vs9EXoa9cPRp9_YV7xeJvJnNvIav-hokK265vQngd-c2tZAcGJRIHpBAE1QmVkFxnL3CwxnTkgaenRC91hCGG7oAHnH9OdgQUnG9E81rTIDAwVz7tc6M6x/s400/GDP+Indicator+One.png" /></a><br /><br />The outcome is not surprising when we take into account that November saw an overall deterioration in business conditions in Russian manufacturing for the second month running. Output rose only marginally, while incoming new orders fell for the first time since June. Growth of purchasing activity was maintained, but at a slow pace, while employment continued to fall. Thus the headline seasonally-adjusted Russian Manufacturing PMI remained below the no-change mark of 50.0 for the second month running, and although the November figure of 49.1 indicated only a marginal rate of deterioration, it was still slightly worse one than the 49.6 posted in October. The fall in the PMI primarily reflected slower output growth and falling new orders.<br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjKisuB1KpLIRLHB4euNnBqmlbKF4G0Uzl7DSGADTL-1K04aKZQB2De3gLu2Vh8CTJwP1ONKJLY-q7f1bU7RhgeQZiGDxSROeSMmYUGaGNHl5gjXNM1wVLur8v6q3ToL0rZxK4M_OM8Bw_X/s1600-h/russia.png"><img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 247px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5411091571181203826" border="0" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjKisuB1KpLIRLHB4euNnBqmlbKF4G0Uzl7DSGADTL-1K04aKZQB2De3gLu2Vh8CTJwP1ONKJLY-q7f1bU7RhgeQZiGDxSROeSMmYUGaGNHl5gjXNM1wVLur8v6q3ToL0rZxK4M_OM8Bw_X/s400/russia.png" /></a><br /><br />Business conditions in the Russian service sector, on the other hand, continued to improve during the month, albeit at a weaker pace than previously. The easing primarily reflected slower rates of growth in business activity and new business, which both remained well below pre-crisis levels. Meanwhile, inflationary pressures remained subdued, with input prices rising at a relatively weak rate and charges falling slightly for the second month running. </p><p><br />The headline seasonally adjusted Russian Services PMI came in at 53.3, down on the 54.3 registered in October, and well below the historic average of 56.9, highlighting the fragility of the Russian recovery. Restricted credit continued to be a theme in this months survey responses, although sector data pointed to a stronger rise in financial intermediation activity. The rate at which incoming new business increased slowed during the month and contributed to additional spare capacity at service providers and a faster decline in outstanding business. Backlogs of work have contracted every month since September 2008, and the latest rate of decline was at the most rapid rate since July.<br /><br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgJkng0HyNLy_CQtgRBMu5vGHmJZolrPSIfErcuTKS9lJN-4ypzJW584DARO93ZG8JddqU8lwp466VNvgATRhz4WGffv-5Au_3sJCHPq0-C9EhymBCmtNrgVsV17_AL3sxHO5hAqjoypFhj/s1600-h/russia.png"><img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 243px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5411355963628930578" border="0" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgJkng0HyNLy_CQtgRBMu5vGHmJZolrPSIfErcuTKS9lJN-4ypzJW584DARO93ZG8JddqU8lwp466VNvgATRhz4WGffv-5Au_3sJCHPq0-C9EhymBCmtNrgVsV17_AL3sxHO5hAqjoypFhj/s400/russia.png" /></a><br /><br /></p>Unknownnoreply@blogger.com6tag:blogger.com,1999:blog-7303901362201842397.post-28253450673956008682009-11-22T17:24:00.005+01:002009-11-26T15:26:10.061+01:00Are Russia's Consumers Getting "Carried Away" With Themselves?<blockquote>“Cutting rates by 50 basis points here and there is not going really diminish the appeal of the ruble,” said Manik Narain, an emerging markets strategist at Standard Chartered Bank Plc in London. “In terms of nominal interest rates Russia (at 9% as of 24 November) is still offering the highest yields in the emerging market space and in an environment where oil prices are remaining relatively well supported we think that the ruble will continue to be seen as an attractive way to position for global recovery,” </blockquote><p><br />The world's central banks are having a hard time of it these days, having just gotten through the worst banking and financial crisis in living memory they now face a growing dilema between continuing to give support to the developed economies (which are yet to recover from those early hammer blows) and the danger of creating fresh global asset price bubbles in emerging economies, asset bubbles which could easily be being fuelled by low US interest rates and a weak dollar. The latest warning in this respect comes not from Nouriel Roubini (or even from me, <a href="http://fistfulofeuros.net/afoe/economics-country-briefings/the-dollar-as-a-funding-currency/">but see this post</a>, and <a href="http://www.forexblog.org/2009/11/interview-with-edward-hugh-the-dollars-demise-is-vastly-overstated.html">this recent interview I gave on Forex Blog</a>), rather it emmanates from Germany’s new finance minister, Wolfgang Schäuble. His comments - which were <a href="http://www.ft.com/cms/s/0/4ec41a1a-d616-11de-b80f-00144feabdc0.html">cited in last Saturday's Financial Times</a> - highlight official concern in Europe that the exceptional steps taken by central banks and governments to combat the crisis carry with them a series of undesireable side effects.<br /><br />Such openly expressed concerns only add further weight to <a href="http://www.ft.com/cms/s/0/85f1fac2-d1dc-11de-a0f0-00144feabdc0.html">recent statements made in China</a>, where only a week ago the banking regulator Liu Mingkao explicitly criticised the US Federal Reserve for indirectly fuelling the “dollar carry-trade” – a process whereby investors borrow dollars at ultra-low interest rates in the United States and the invest them in higher-yielding assets abroad.<br /><br />Wolfgang Schäuble went even further, saying it would be “naive” to assume the next asset price bubble would look just like the last one. “More likely today is a scenario in which excess liquidity globally creates a new [sort of] asset market bubble.” he said, and the fact “ that low interest rate currencies such as the US dollar increasingly being used as a basis for currency carry trades should give pause for thought. If there was a sudden reversal in this business, markets would be threatened with enormous turbulence, including in foreign exchange markets.”<br /><br />As I argued in my last post on the carry trade, the danger of a short term sudden reversal may be being overstated at this point, since exit from emergency life support will be at best slow and measured in the United States, while ample funding will continue to remain available in Japan, where the central bank <a href="http://www.ft.com/cms/s/0/c3a3be3e-d608-11de-b80f-00144feabdc0.html">has now formally recognised that the economy is once more back in deflation</a> (officially it exited in 2006, and the Bank did manage to summon up a full half percentage point worth of interest rate rise before falling back towards zero again, but in reality, if we strip out the oil price impact, the sad truth is that Japan never really left deflation).<br /><br />However, regardless of whether or not we are running the danger of having an overly rapid unwind effect, untold damage is in fact being done, with the structural distortions being produced by the massive “wall of liquidity” which is currently sweeping the planet being evident enough, showing up as it is in some unexpected places, like Russia for example.<br /><br /><br /><strong>Ruble Once More On The Rise</strong><br /><br />On the face of it the idea that investors who were rushing for the Russian door following the Roki tunnel incursion back in August 2008 may now be rushing back in again may seem hard to believe, particularly given the serious economic recession which followed, and in reality it isn’t quite like this, but what is clear is that a steady and significant flow of funds is now most definitely heading in Russia’s direction - even if the immediate objective is not to increase what Russia most definitely needs, namely capital investment. A brief glance at the charts for movements in the ruble vis a vis the US dollar (see below) shows immediately what has been happening. After hitting a low of $31.39 on September 2 the ruble has been steadily rising, and was at $28.65 on November 11, since which time it has been hovering, as investors vacilate waiting to see where policy and the currency go from here.</p><p><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiPsysW-5sI9Pw6pLJcN8bcON-ar5qbRtY-BWz2BGOuRDsmAb1_Qs6fUMy3GhVfCOw_A0F8yIy-eZgFifd8s4Kuqeo1G1wYlxrg4kTCtzUtgpt5AZuHne3TbXyiXRR31z2bYhhCReAnxAwI/s1600/rouble+2.png"> </p><p><img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 240px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5408305743940365858" border="0" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiPsysW-5sI9Pw6pLJcN8bcON-ar5qbRtY-BWz2BGOuRDsmAb1_Qs6fUMy3GhVfCOw_A0F8yIy-eZgFifd8s4Kuqeo1G1wYlxrg4kTCtzUtgpt5AZuHne3TbXyiXRR31z2bYhhCReAnxAwI/s400/rouble+2.png" /></a> At the same time, if we look at movements in the ruble-USD over a longer period of time (2 years in the chart below) it is plain the the ruble hit bottom on 4 February 2009 at $36.22 after falling steadily from 17 July 2009 when it touched $23.25.</p><p> </p><p><br /></p><p><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjiCdFgAK7jIsx57ta8q6RayJyEwVxEDnqCnFoUwqVaqKTob-ctTXtSooUe7BLmbGkIOx-HTz6Y_ZUXRQjm_bSaPHLHPGNrfHXiGv1Bnw__pqc0639j8SGr2Uwk-U-H8tE0o3mh9Ok1Yhkn/s1600/rouble+one.png"><img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 244px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5408305680008748370" border="0" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjiCdFgAK7jIsx57ta8q6RayJyEwVxEDnqCnFoUwqVaqKTob-ctTXtSooUe7BLmbGkIOx-HTz6Y_ZUXRQjm_bSaPHLHPGNrfHXiGv1Bnw__pqc0639j8SGr2Uwk-U-H8tE0o3mh9Ok1Yhkn/s400/rouble+one.png" /></a><br /><br />In fact, as I say, while it is clear that Russia is on the receiving end of a steady inflow of funds, it is far from clear that these funds are of the kind she most needs at this point. Much of the money has been going into stocks, and Russian equity funds drew record amounts at the end of October, according to data provided by EPFR Global. In fact Bloomberg data show that the ruble has been the second-best performer among emerging market currencies after the Chilean peso over the past three months, gaining 8.7 percent in the period. And even foreign currency purchases from the central bank and lowering interest rates systematically to a record low (in Russian terms) has not worked. Indeed Russia's foreign currency reserves have now risen to $441.7 billion (as of Nov. 13) compared with the low of $376.1 billion reached on March 13. Whilethe Micex Stock Index has gained 116 percent this year, making the Index the best-performing benchmark equity measure globally since January (in local currency terms), again according to Bloomberg data. <br /><br />In comparison Russia’s foreign direct investment plummeted an annual by 48.1 percent, the most on record, to just $10 billion in the first nine months of the year, while overall foreign investment, including credits and flows into securities markets, was $54.7 billion, down 27.8 percent when compared with the same period a year earlier,according to Federal Statistics Service data. Other foreign investments, including loans from foreign banks and Russian companies’ foreign divisions, were down 20.9 percent in the period to $43.7 billion. The consequence of all this is that the decline in investment activity has been - as can be seen in the GDP growth components chart below - perhaps the greatest single drag on the domestic Russian economy over the past twelve months.<br /><br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgNs_lnvkibLLTyPuQML6ZuIf5dtwpf_ffn8ksxbz2in1bG34ewpY8ca6d7z07rcSVwNZ95K-WIsu252GrBkstDLZceP0cHotupG_hf9FZx6rm6Md_XNQ73SSMx-40Xi4AgQgHmFgB3L8E5/s1600/russia+growth+components.png"><img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 297px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5407338743595927282" border="0" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgNs_lnvkibLLTyPuQML6ZuIf5dtwpf_ffn8ksxbz2in1bG34ewpY8ca6d7z07rcSVwNZ95K-WIsu252GrBkstDLZceP0cHotupG_hf9FZx6rm6Md_XNQ73SSMx-40Xi4AgQgHmFgB3L8E5/s400/russia+growth+components.png" /></a><br /><br />But, as I am stressing this earlier overall impression of Russia as a country with problems of net capital flight now no longer gives us a precise up-to-date picture because, in a reversal of the earlier pattern Russia has seen, since mid September, significant capital inflows. In this sense some of the aggregate flow data is misleading, and even while the pressure from foreign lenders to repay sindicated loans continues and Russian borrowers continue to have difficulty rolling over their debt, the aggregate capital flow data to some extent masque a change in the underlying structure of Russian external debt - here, as ever, the devil lies in the details. As Guillaume Tresca, a Paris-based emerging market strategist with Credit Agricole’s Caylon Unit, argues the mounting weight of that huge wall of liquidity sweeping the planet means that something somewhere has to give, with the consequence that the Russian authorities are now under severe pressure to accept the inevitability of short term ruble appreciation since even though they “will try to do what they can to smooth the process, it’s very hard for them to go against the flow” since current “capital inflows are massive.”<br /><br />In fact a growing consensus seems to be now emerging that Russia’s central bank will find itself forced to accept a stronger ruble next year as the devastating cocktail of rising commodity prices and abundant liquidity simply prove to be too powerful a force for policy makers to counter. So while representatives of the Russian administration have repeatedly asserted that they will do all they can to cap the ruble’s advance, all may well not be enough, despite Vladimir Putin's repeated declarations that his government won’t allow excessive appreciation in a bid to give some support to struggling exporters. The Canute like task of driving back the ocean is hardly an easy one, and, as the IMF itself recently warned, all efforts to fight the ruble’s advance may simply prove to be “unproductive.”<br /><br />The problem has recently become even more complicated since, in the short term at least, letting the rouble rise also has its attractions for a Russian administration faced with simmering popular frustration with their inability to get the ongoing economic contraction fully under control. A rising ruble means slower inflation and more spending power for domestic consumers, consumers who have yet to get over the record 10.9 percent economic contraction which hit them in the second quarter. Given that the nine interest rate cuts introduced by the central bank since April have manifestly failed to unlock the credit flow to consumers as banks hold back their lending on concern borrowers can’t repay their debt (see chart below) a rising exchange rate certainly seems to be worth a second look as a way forward, since while a higher exchange rate coupled with near double digit inflation may cripple manufacturing competitiveness, it does transfer incomes directly into people’s pockets, something hard pressed politicians might see as quite beneficial.<br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgbbrc6NN_SCFRBUh0ZFQh6RwDfm94-bBoAjOf7q-HZW6pMQ0nb1zlTbOdwNvOGXNxuOBqN4C5ryyvOLna5G6SRPXJmuV5z7LP4ZiupVxTQVlxvrxwgYrEnc3EB8E7jblU6t0L4FKEWs0Nn/s1600/russia+credit+growth.png"><img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 327px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5407685003122500626" border="0" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgbbrc6NN_SCFRBUh0ZFQh6RwDfm94-bBoAjOf7q-HZW6pMQ0nb1zlTbOdwNvOGXNxuOBqN4C5ryyvOLna5G6SRPXJmuV5z7LP4ZiupVxTQVlxvrxwgYrEnc3EB8E7jblU6t0L4FKEWs0Nn/s400/russia+credit+growth.png" /></a> <br /><br />Lending is still - as can be seen in the above chart prepared by the World Bank for its latest report - a problem, and corporate (or non-financial corporation lending) fell by 0.7 percent in September from August continuing the ongoing decline. Lending to households dropped 1.1 percent making the eighth consecutive monthly decline, with year on year levels now in negative territory, while non performing retail loans rose, climbing to 6.4 percent from 6.2 percent.<br /><br />And the World Bank expect the many bank balance sheets will continue deteriorating as the share of non-performing loans increases. “In the environment of increasing credit risks, lending activities by the banks have remained limited despite improving liquidity conditions in the economy and continuing monetary loosening.” Bad debts in the banking industry may reach an average of 10 percent by the end of the year according to the Bank.<br /><br /><br />And when we look at ruble realities, as the IMF point out, efforts to stem the ongoing rise with intervention are far from being able to give the desired result. Bank Rossii bought a net $15.2 billion and 485 million euros in October, their largest foreign currency purchases since May, and went on to buy $6 billion during the first 17 days of November according to press reports citing central bank chairman, Sergey Ignatiev. Yet last week the Russian the ruble ended 0.1 percent higher at 35.0632 against the central bank’s target currency basket, its strongest level since December 23 2008. The ruble appreciated 3.4 percent in October against the dollar (for its second consecutive monthly gain) and has risen more than 1 percent so far in November. Thus the central bank has now moved on to use monetary policy to try and stem the rise, and said on October 29 that it would also use interest rates in an attempt to reduce the “attractiveness of short-term investments in Russian assets and stop the accumulation of risk”.<br /><br />The recent rise follows ruble a 35 percent slump against the dollar between August last year and January, raising the cost of imports (which make up about 49 percent of the consumer goods sold in Russia) and, in theory, making Russia's domestic industry somewhat more competitive externally. However, without a sound institutional infrastructure, and a coherent monetary policy, short term devaluation gains can easily be turned into medium term inflation, thus defeating the purpose of corrective price devaluation.<br /></p><p></p><br /><br /><br /><p>The current problems are not of recent making, but are the logical end product of steady and systematic long term mismanagement of Russia's monetary policy, a mismanagement which has now created a veritable Procrustean bed of problems for both Russia's economy and the wider society. Warnings were frequent enough, but went unheaded, and the continuing failure to address the underlying inflation problem between 2005 and 2008 now means that large structural distrortions have been accumulated in the economy, including a massive one of commodity export dependence, a problem which effectively turned the country into a veritable disaster waiting to happen if ever there should be a protracted lull in the secular rise in energy prices. That lull has most definitely now arrived, since while it is obvious that Russia's short term future depends on energy prices, it is far from clear what the future holds for those energy prices themselves. </p><br /><p><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEi-78Ym-qTjnw7pxMzdrXOHJX75wj6QfxwTowItgIpMm0z-dul6DJ0D375WJ14lsQgPetaaoSlGRIsuzZ2f5lFVe8qy-ZnD9Zbaz8t-IEv7I8lFTtifaj7IpMq8CZ2EUdJmpYcgu907j8Rr/s1600/world+bank+oil.png"><img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 283px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5407690218112776594" border="0" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEi-78Ym-qTjnw7pxMzdrXOHJX75wj6QfxwTowItgIpMm0z-dul6DJ0D375WJ14lsQgPetaaoSlGRIsuzZ2f5lFVe8qy-ZnD9Zbaz8t-IEv7I8lFTtifaj7IpMq8CZ2EUdJmpYcgu907j8Rr/s400/world+bank+oil.png" /></a><br /><br />Weak global demand for oil has led to a sharp rise in excess capacity and OPEC's spare capacity has risen to levels not seen since 2002, when prices averaged USD25/barrel with OPEC’s pricing power staying very low. Up to now oil prices have remained in the USD70/barrel range, supported by OPEC output restraint and its stated desire to have prices reach what it calls "a comfortable level" - ie near USD75/barrel - as well as by expectations of rising demand. At its September 2009 meeting, OPEC left its production quotas unchanged but indicated it would take rapid action if prices dropped sharply. OPEC production, however, continues to edge higher, with compliance to its combined cuts of 4.2 million barrels per day falling to 66 percent in September from 71 percent in August. Thus there is evidence of OPEC strains and there is considerable uncertainty about real levels of 2010 demand, all of which makes for considerable uncertainty about prices. As can be seen in the above chart, World Bank oli price estimates (like their economic growth ones) have fluctuated, and have moved from a price estimate in March of around $62.95 for 2010 to the current (November) expectation of $75.29. While the earlier estimate may certainly be considered to be on the low side, the current one may well be too high, and a level of around $70 may not be an unrealistic forecast. It should be noted however that there are credible dissenters, and in a more or less reasoned analysis Capital Economics suggest that oil prices could well fall back again in 2010 to average somewhere around $50. If this forecast were to prove to be anywhere near correct, the Russian economy is going to be subject to major downside risks, due in particular to the difficulties posed by:<br /><br />i) financing the fiscal deficit<br />ii) rising unemployment<br />iii) growing bad loans in the banking system<br />iv) refinancing external debt<br />v) the continuing high level of consumer price inflation and the difficulties this poses for monetary policy at the central bank<br /><br />Added to all this, the economy will clearly not rebound as easily as many seem to foresee, adding to the risk element on all fronts.<br /><br /><br /><strong>A Return To Growth In The Third Quarter</strong><br /><br />Following the deep output drop sustained in the first half of the year (10.4% of GDP year on year), the slow recovery in global demand and rise in commodity prices has helped lift Russia’s economy up from its earlier lows. But the recovery has only been a modest one, since preliminary data indicate that the economy still registered a 9.4 percent year-on-year drop in the thrid quarter, indicating only a very small improvement (possibly a seasonally adjusted 0.6%) over the second quarter. More recent data also point towards a rather uneven progression, with the manufacturing sector falling back while rising real incomes means that consumer demand is producing stronger growth in the services sector.<br /><br />As in other countries, investment (both foreign and domestic) took a severe hit on the back of the credit crunch, and gross capital formation was indeedthe main demand side factor dragging GDP down in the first half of the year (by 14 percentage points), followed at some distance by consumption, which contributed 1.2 and 3.0 percentage points to aggregate output contraction rates respectively in the first and second quarters. Net exports, on the other hand, made a positive contribution (5.1 percentage points in the first quarter and 5.9 percentage points in the second) although <strong>as elsewhere</strong> the <strong>drop in imports</strong> was the key factor. When imports are looked at in volume (price adjusted) terms we find that real ruble depreciation (the real effective exchange rate depreciated by 5.9 percent in the first nine months of 2009) meant that the import contraction was more severe than it seemed, especially in the second quarter of 2009 when the drop in imports meant that net exports increased by 66 percent according to World Bank calculations.<br /><br /><strong>Unemployment Falls Back, But Problems Remain </strong><br /><br />Six million Russians were added to the government’s official poverty count in the first quarter of this year alone, and by the end of 2009, 17.4 percent of the population or 24.6 million people will be living beneath the subsistence level of $185 per month, almost 5 percent more than before crisis, according to World Bank estimates. Unicredit analysts forecast that the number of Russians with disposable incomes of more than $1,000 per month will fall 48 percent this year to about 13.6 million, or roughly 9.6 percent of the population. Thus this recession is likely to have lasting and important results.</p><br /><p>On the hand, employment statistics from the Federal Statistics Service indicate that a sharp downward adjustment in the labour market took place up to February this year, before moderating and then reversing. Unemployment seems to have peaked in February at 9.5 percent following the sharp decline in output, and the severity of the blow was especially strong in the industrial sector. </p><br /><p><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhH6OnXbiZqZGqGeqspz-7n0HsCzxRHoPSsBdHFsaD1NtykYgW6wDbRvrd-XjW4PjRze06lGkcI1vUVAxuYtBnSbunJ_xFkl7XEmriWkkBLVmJAJC_dyWFe2YtI2ju0q1WQbw88rEDGYrkx/s1600/russia+unemployment.png"><img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 201px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5407695821023297026" border="0" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhH6OnXbiZqZGqGeqspz-7n0HsCzxRHoPSsBdHFsaD1NtykYgW6wDbRvrd-XjW4PjRze06lGkcI1vUVAxuYtBnSbunJ_xFkl7XEmriWkkBLVmJAJC_dyWFe2YtI2ju0q1WQbw88rEDGYrkx/s400/russia+unemployment.png" /></a><br /><br /><br />Since the beginning of March 2009, however, with real level of economic activity bottoming out (see above chart), the labor market continued to show moderate improvement: by September the number of those in employment had increased by 2.6 million, and the rate of unemployment fell to 7.6 percent, down significantly but still much higher than in September 2008 (5.8 percent). According to the World Bank this steady improvement is rather misleading as it reflects significant seasonal gains in employment and a shift in labor adjustment towards labor hoarding in the manufacturing sector.<br /><br />As the World Bank also notes, the long term regional differences in Russian unemployment rates are striking ranging from a low of 1.6 percent in Moscow to a high of 52.1 percent in Ingushetia in August 2009. Traditionally unemployment is largely concentrated in the Southern, Far Eastern and Siberian federal districts. However, the crisis related unemployment shows a different pattern, with the largest increases in unemployment being found in the North Western District (from 4.8 to 7 percent) and the Urals (from 4.9 to 8.1 percent). Regression analysis carried out by the World Bank revealed that unemployment levels were higher in those regions with higher levels of manufacturing, and where industrial production accounted for a larger share of GDP.<br /><br />And while it is entirely possible that the economy will show a “modest” recovery in the second half of 2009, this is “unlikely to have significant impact on social indicators,” according to the World Bank. Unemployment will increase to 9 percent “as seasonal factors wane” from 7.6 percent in September and it may take three years before the number of Russians living in poverty falls to pre-crisis levels, the World Bank estimates. Indeed, in the short term real incomes are “likely to fall further". </p><br /><p><strong>Monetary Policy Mess </strong><br /><br />The political threat posed by growing unemployment and rising poverty must most certainly be one of the reasons behind Russia’s central bank recent decision to lowered its key interest rates for the eighth time in six months, in a bid to both stimulate lending and to stem the inflow of funds and the rise in the value of the ruble which is making the work of restoring competitiveness to the manufactured sector all the more difficult. Earlier this month Bank Rossii cut the refinancing rate to 9 percent from 9.5 percent and reduced the repurchase rate charged on central bank loans to 8 percent from 8.5 percent. Despite the reductions Russia still has the fourth-highest benchmark interest rate in Europe after Ukraine, Iceland and Serbia.<br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgI7QyQiFDEaaWd6HCxZGXKXwQcB_wexPjWyeVEQ_sDqaoE60HhyspUFBTT_6UlK1v_SSw68gCs9LBEvckWoqK30pFYPGQeG9-zH2KJVFbsM7aAU2FxiuODoouz9bXvnU6SnK4Yw6DCKMAr/s1600/russia+interest+rates.png"><img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 230px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5408181483981076626" border="0" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgI7QyQiFDEaaWd6HCxZGXKXwQcB_wexPjWyeVEQ_sDqaoE60HhyspUFBTT_6UlK1v_SSw68gCs9LBEvckWoqK30pFYPGQeG9-zH2KJVFbsM7aAU2FxiuODoouz9bXvnU6SnK4Yw6DCKMAr/s400/russia+interest+rates.png" /></a><br /><br />The best thing that can be said about Russian monetary policy instruments is that they are hopelessly ineffictive. Even October consumer-price growth at 9.7% annually, while well down on the 15.1 percent peak hit in June 2008, is still horribly unacceptable, and it is extremely hard to understand how economic mismanagement and incompetence can have reached such a level that an economy which has been contracting at the rate of nearly 10 per cent a year can still have this kind of price inflation. There is no other word for it, this is a mess.<br /><br /><br />The bank is caught on the horns of a large dilema, since cutting rates further to stem inflows and the ruble rise may only risk fuelling more inflation, yet First Deputy Central Bank Chairman Alexei Ulyukayev stressed only this week (following the latest in rate decision) that the central bank did not exclude the possibility of further cutting its rates since it sees “no inflationary risks” next year and an inflation rate “much lower” than 9 percent. This follows explicit remarks at the end of October that the Bank was ready and willing to use interest rate policy as required to stem speculative capital flows that "threaten to undermine currency stability". <br /><br /><strong>Inflation Woes</strong><br /><br />One small consolation at least in this ongoing mess is that pressure on Russia’s producer prices have been easing, and factory gate prices have even been falling. According to the preliminary data from the State Statistics Service, the price of goods leaving factories and mines was in fact down an annual 10.8 percent in August following a record 12.3 percent drop in July. Evidently The with the 2008 spike in oil and energy prices the logic behind this is easy to see. What is not so easy to see is why domestic prices take so long in responding to general capacity utilisation signals and why the Economic Development Ministry still seems comfortable with the expectation that average inflation will range between 12 percent and 12.5 percent in 2009 only marginally down from last year’s 13.3 percent. Stunning!<br /><br /></p><br /><br /><p><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEibTRH4dShveOjHc0QCLFuc2SIzgSPKLy5aS6QBeABl9SomUeQKnSTYTyb5HbsMIGm5SoiyRYBtl0tMthN5T6Wgx0d5XVKrtLT0cwy6pn6f_xKKQAzwNzesuWLpusja4ycHCRtZO3xqWpnx/s1600/russia+inflation.png"><img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 243px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5408002903880749650" border="0" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEibTRH4dShveOjHc0QCLFuc2SIzgSPKLy5aS6QBeABl9SomUeQKnSTYTyb5HbsMIGm5SoiyRYBtl0tMthN5T6Wgx0d5XVKrtLT0cwy6pn6f_xKKQAzwNzesuWLpusja4ycHCRtZO3xqWpnx/s400/russia+inflation.png" /></a><br /><br />And while consumer price inflation has been tame in recent months this good behaviour may not last long, since it could rise more than expected in November, according to Deputy Economic Minister Andrei Klepach, who does not seem to completely share Alexei Ulyukayev price optimism. Consumer prices could rise "by about 0.3% to 0.4%" in November, Klepach said in comments recently, and this prediction seems to be near the mark, since according to the latest data we have consumer prices rose 0.1% in the week to 9 November, bringing to an end a period of just over three months without inflation. Looking into the future price growth may be further spurred by an influx of budget spending in the fourth quarter, as well as by a planned 30% increase in pensions which is due to come into effect on 1 December.<br /><br />In fact, despite the fact that inflationary pressures have been easing in Russia in recent months, chiefly due to collapsing consumer demand and outlfows of capital following the crisis that hit the country a year ago, the official outlook for Russia's inflation in January 2010 is only that it will be "significantly below "the level of January 2009. This kind of argument is hardly reasssuring, since inflation last January was at an annual rate of 13.4%, although the short term outlook is for only a mild acceleration, with consumer prices increasing by between 0.2% and 0.3% in November and by about the same amount in December.<br /><br /><strong>Why Not Devalue?</strong><br /><br />Well, one way not to solve the problem, according to European Bank for Reconstruction and Development Chief Economist Erik Berglof, would be a ruble devaluation, since despite recognising that the country has a very difficult couple of years in front of it, Berglof argued recently that “this (devaluation) is the wrong way to think about the recovery in Russia”.<br /><br />As he said, Russia’s failure to wean itself off its reliance on commodity exports has condemned the country struggling to find economic growth in the face of a large drop in demand for its key export products. “If you want to have a flexible exchange rate, you need to get out of this dependence on commodities,” Berglof said. “It’s a major concern that in the last 10 years Russia has become actually more dependent on commodities. Unfortunately, not much progress has been made.”<br /><br />Well, this is exactly the point, and is why I have been arguing over the last two year about how <a href="http://russiatooat.blogspot.com/2007/12/inflation-in-russia-two-much-money.html">all those wage increases which the Russian administration seemed to rejoice in</a> (since they bought short term popularity, and fuelled consumption) simply stoked-up the domestic inflation bonfire and in the process did untold damage to domestic competitiveness. However it is evident Russia's industries cannot now simply be transformed overnight, and this is where I find a weakness in Berglofs argument, since some remedy is needed to straighten out the distortions and get of commodity export dependence. But what? If it isn't devaluation, then surely we will need to see very substantial wage deflation in order to attract the now much needed inward foreign investment. The current position whereby prices rise by an annual 10%, and living standards are maintained by a sharp rise in the value of the ruble (making imports cheaper) is quite simply unsustainable, for reasons which should be evident from looking at the chart below. If you look at the green line (which shows the Real trade weighted Effective Exchange Rate) we will see how this has risen sharply since 2003, with the exception of the drop in the value of the ruble in the second half of last year. If we then look at the blue line (which shows the non oil and gas current account balance) we will see how this has been steadily deteriorating (again with the exception of the short sharp shock occassioned by the crisis of last autumn). However, as we can also see, the green (REER) line has now once more resumed its upwards march - the consequence of all those financial inflows, and the associated rise in the ruble - and with the upward march comes the ongoing structural damage to the economy, precisely the can't of structural damage which Erik Berglof would like to avoid, and even unwind.<br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhm-TOeF9K_OfIjP75ZSnt2lcuZktTXp0MyGB5ead0RLoakOdzTNQ0htDcokJvbreGCp7wNeQFx0dVi6PcisJizHk7O6slNah0HnvHzU_rVobowOIP4DP9zL_4r-Lf8BAGJQDrwQNy_vW0J/s1600/Russia+REER.png"><img style="display:block; margin:0px auto 10px; text-align:center;cursor:pointer; cursor:hand;width: 400px; height: 347px;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhm-TOeF9K_OfIjP75ZSnt2lcuZktTXp0MyGB5ead0RLoakOdzTNQ0htDcokJvbreGCp7wNeQFx0dVi6PcisJizHk7O6slNah0HnvHzU_rVobowOIP4DP9zL_4r-Lf8BAGJQDrwQNy_vW0J/s400/Russia+REER.png" border="0" alt=""id="BLOGGER_PHOTO_ID_5408393036051349714" /></a> <br /><br />Of course not everyone agrees with Berglof, and the Russian Association of Regional Banks, whose 450 members include the Russian units of Barclays and Citigroup, has called for a devaluation of as much as 30 percent. Billionaire Vladimir Potanin, realist and owner of 25 percent of OAO GMK Norilsk Nickel, said in recent interview with the Russian Newspaper Vedomosti that the “interests of the economy” will lead the currency to depreciate in the “mid term,” allowing exporters to cut costs and modernize production.<br /><br />Nonetheless energy, including oil and natural gas, accounted for 69.1 percent of exports to countries outside the former Soviet Union and the Baltic states during the first seven months of this year, according to the Federal Customs Service, while metals were responsible for another 12%. So the commodities dependency is massive, and this situation can't be turned round easily.<br /><br /><strong>Getting Carried Away By Global Liquidity?</strong><br /><br />Bank Rossi are also not 100% convinced by the merits of Berglof's reasoning, as witnessed by the fact that they facilitated a 35 percent depreciation in the ruble during the second half of last year (see chart below), and as the collapse in raw material prices and the dramatic change in local credit conditions first pushed Russia's economy into recession the ruble’s trading range was widened to between 26 and 41 against the dollar-euro basket.<br /></p><br /><p>However, as I keep stressing, the central bank is now locked on the horns of a massive dilemma, since as risk appetite returns, with it comes the enthusiasm for buying the so called "high yield" currencies - like the South African Rand, the Russian ruble and the Hungarian forint. Instruments denominated in all these currencies offer investors substantial returns at the present time thanks to offering some of the highest interest rates among globally traded currencies.<br /><br />Indeed buying Russian rubles was one of the key recommendations made by Angus Halkett, currency strategist at Deutsche Bank in London, in a research report published back in April, and the market seems to have followed his advice The so-called carry trade works by investors borrowing in currencies with low interest rates and good prospects of continuing depreciation (the USD at the moment, for example) in order to buy higher-yielding assets, in countries with high domestic interest rates and continuing prospects for ongoing appreciation.<br /><br />In general, engaging in one or other form of the thousand-and-one-varieties carry trade is pretty standard practice during times when returns for real economic activity are low, and central banks hold down rates and supply liquidity. Indeed we may include here the kind of carry practiced by banks in borrowing from the central banks only to then lend - for a small, but very low risk, interest rate commission - to their national government, who at this stage in the business cycle will normally be running a fiscal deficit. So more than funding recovery, the watchword at the moment is very much "carry on carrying".<br /><br />But for those on the receiving end, the consequences of so much carry are far from innocuous, since the process simply funds all sorts of economic distortions, and far from allowing normal market corrections to occur, it simply amplifies the problem. Things are now becoming very detached from the so called "fundamentals" (whatever those might be in the topsy turvy world in which we now live), since it simply is not plausible that the currency should be rising in this way in a country with nine percent plus consumer price inflation and which badly needs to move away from commodity export dependency. The only conclusion which could be drawn is that the Russian economy now needs massive structural reforms, and on any imaginable scenario in the world in which I live these are simply not going to be implemented.<br /><br />On the other hand Russia’s central bank may have to accept a stronger ruble next year as rising commodity prices prove too powerful a force for policy makers to counter and as consumer demand plays a bigger role in the bank’s decisions. The authorities “will try to do what they can to smooth the appreciation, but it’s very hard to go against the flow,” said Guillaume Tresca, Paris-based emerging market strategist for Calyon, the investment-banking unit of Credit Agricole. “Capital inflows are massive.”<br /><br />Policy makers have indicated they will cap the ruble’s gains and Prime Minister Vladimir Putin has said his government won’t allow an excessive appreciation as exporters struggle to tap into a global trade recovery. Even so, efforts to fight the ruble’s advance may prove “unproductive,” the International Monetary Fund warned on Nov. 12, adding that “underlying factors” justify its strength. There is a growing consensus that Russia’s central bank is now close to accepting the inevitable, and will allow the ruble to continue appreciating to help domestic demand and cap inflation. As Clemens Grafe, chief economist at UBS in Moscow puts it, “A higher exchange rate, because it transfers incomes into people’s pockets, could actually be more beneficial,”<br /><br /><strong>Fiscal Resources Near To Running On Empty?</strong><br /><br /><br />According to preliminary estimates from the Ministry of Finance, the federal budget deficit totaled 4.0 percent between January and September, slightly below the expected level, in part due to the under execution of budgeted expenditures in the first three quarters of 2009. The federal non-oil deficit (which excludes drawing on oil revenues) amounted to 11.0 percent. This is managable, especially given the comparatively low level of Russian sovereign debt to GDP. However, as the World Bank point out under the likely scenario of a sluggish global recovery and modest growth, Russia will face a tightening budget constraint and need to reduce expenditures and the fiscal deficit over the medium term. Further, funding the planned increase in social expenditures, mainly related to increases in pensions, may well requires spending cuts in other expenditure categories. </p><br /><br /><p>The Ministry of Finance baseline federal budget estimates with conservative oil assumptions icorporate plans to reduce the federal budget deficit from 8.3 percent of GDP in 2009 to 3 percent in 2012, but the medium term fiscal outlook also indicates an extensive drawdown of Russia's Reserve Fund to finance the deficit. Given the size of the anticipated deficit, the Reserve Fund is likely to be depleted by the end of 2010 and borrowing will be required to offset the gap. Estimates of the Ministry of Finance indicate that the combined external and internal borrowing to cover the fiscal deficit will amount to 1.0 percent of GDP in 2009, 1.6 percent in 2010, 2.5 percent in 2011, and 1.5 percent in 2012. All of this is manageble, but the depletion of the Reserve Fund does mean that if downside risks materialise, and in particular if there are more writedowns in the banking sector needing government support that there is now little in the way of a cushion between managed adjustement and unstable dynamics.<br /><br /><br /><strong>Outlook – A Hard Road To Travel</strong><br /><br /><br />If one thing is clear hear it is that attaining a recovery in Russia's economic fortunes at this point is going to be no easy feat, as <a href="http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aC8Q3ycECRlw">Trust Investment Bank put it in their latest report</a>, October data for the world’s largest energy exporter suggest “an almost complete absence of clear signs of recovery” since industrial output slumped and capital investment fell. October capital investment was still down 17.9 percent while industrial output dropped an annual 11.2 percent in October worse than the September reading. Even unemplyment was up again, at 7.7%, although as the World Bank pointed out, this is the result of the same seasonal factors which lead to the fall in unemployment over the summer. <br /><br />On the other hand, this is by no means a one way street, since disposable incomes climbed a monthly 6 percent in October and rose 3.9 percent compared with the same period last year, registering their biggest annual jump since September 2008, according to provisional data from the Federal Statistics Service, while wage declines eased with wages falling an annual 4.5 percent, compared with a 4.9 percent annual decline in September. And retail sales, which had previously fallen for nine consecutive months, the longest period of declines on record, suddenly sprang back to life, with October retail sales rose 3.2 percent from September and declined by 8.5 percent on an annual basis as compared with a 9.9 percent drop the month before.<br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEinrpLl_e_56nJPxD7nUyP6p7FH2wRnTyKGWCW7bnyDHAozn7Dhk6d6Nr3L8ydESdUp6c0HqP18ysGn05eRsSDElqc3hdXUgic-UzjYI2I6e9YG_Jv5RnToqjkr-LzfCo2CyHm4faH41-1-/s1600/russia+retail+sales.png"><img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 242px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5408006395968774402" border="0" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEinrpLl_e_56nJPxD7nUyP6p7FH2wRnTyKGWCW7bnyDHAozn7Dhk6d6Nr3L8ydESdUp6c0HqP18ysGn05eRsSDElqc3hdXUgic-UzjYI2I6e9YG_Jv5RnToqjkr-LzfCo2CyHm4faH41-1-/s400/russia+retail+sales.png" /></a><br /><br />Other data also show this mixed picture. Monthly GDP Indicator data from VTB Capital, based on the PMI surveys for the Russian manufacturing and service sectors, continued to show economic contraction on an annual basis in October, butthe rate of decline eased for the fifth consecutive month. The Indicator showed a 0.6% annual contraction, the slowest rate seen suring the current eleven-month period of continuous decline.<br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiODRpQ2K_eb4ZoRXbxoc0Es8kRhixRARtakkuODf63BQMcPh4YMcObICyQ9ntrBLUTUj21rzzBMXxKOiXcrYnuDenK1_dw5G75blSdtEmg3loevu82V65G4GJLQIHlyBugZbx-UFq7hOzK/s1600/GDP+indicator+2.png"><img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 243px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5408168501901732850" border="0" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiODRpQ2K_eb4ZoRXbxoc0Es8kRhixRARtakkuODf63BQMcPh4YMcObICyQ9ntrBLUTUj21rzzBMXxKOiXcrYnuDenK1_dw5G75blSdtEmg3loevu82V65G4GJLQIHlyBugZbx-UFq7hOzK/s400/GDP+indicator+2.png" /></a><br /><br />The seasonally adjusted Total Activity Index remained above the no-change mark of 50.0 for the third month running in October, indicating growth of private sector output. The Index improved fractionally over September, to 54.2, indicating reasonably robust growth (although it remained below its historic trend of 56.6). This was driven by a faster rise in services activity, while the rate of growth in manufacturing production slowed to a weaker pace. On a quarterly basis the indicator showed 0.4% q-o-q growth for the second month running.<br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh-siTYiU_fNggDg2fFJTLtVoltBm3oLjkYEy2HQCn_sgeWDvG-lDwlyqahtQ9KiQ3yGOw3wTq7Ibfxxd-wzLBh_S46JyCerJaov-vpYNm49rZzLmQl03nonSBWjz1AJpohfm4yEmFmar3Y/s1600/GDP+Indicator+One.png"><img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 242px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5408166525313307218" border="0" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh-siTYiU_fNggDg2fFJTLtVoltBm3oLjkYEy2HQCn_sgeWDvG-lDwlyqahtQ9KiQ3yGOw3wTq7Ibfxxd-wzLBh_S46JyCerJaov-vpYNm49rZzLmQl03nonSBWjz1AJpohfm4yEmFmar3Y/s400/GDP+Indicator+One.png" /></a><br /><br /><blockquote>Commenting on the survey, Aleksandra Evtifyeva, Senior Economist at VTB Capital, reported:<br /><br />““The GDP Indicator continued to point to an improvement in economic activity in October. The manufacturing sector’s performance deteriorated slightly while activity in the services sector is approaching pre-crisis levels. This might be one of the consequences of higher oil prices and a stronger rouble as low export orders were the main drag on manufacturing. Another encouraging development highlighted by the October surveys was the deceleration in the pace of job cuts: the employment sub-indices now stand at around 47, which is already higher than last autumn.</blockquote><br />The GDP indicator reading was based on manufacturing sector survey findings which confirmed that overall Russian manufacturing business conditions deteriorated in October. Although output, new orders and input purchases all continued to grow, the rates of expansion slowed compared to September. Moreover, manufacturers shed jobs at a faster pace than in September.<br /><br />The headline seasonally adjusted Russian Manufacturing PMI fell from 52.0 in September to 49.6 in October, signalling an overall deterioration in the business climate at the start of the fourth quarter. It was the first month-on-month fall in the headline index since it plummeted to a record low (33.8) in December 2008, although the latest figure was indicative of only a marginal rate of decline. Of particular note, the new export orders index posted a strongish decline to 47.8, evidently reflecting the recent ruble appreciation. The input price index continued to point to strong rise in costs associated with metals, energy and oil-related items while output prices index pointed to a moderating growth in price charged.<br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEg1SXHw22HtZEk1ZFLC8FH1ju7wqtO12E5F7vHSf3q6X_BnHpg3xJJ2TqfqKu2o-T_PnptQzgD10ALpVhzWOWlkBCD5u7faL9_N1owiSfb_Iak1rXh5glrnzgKFfR8nlrQEJR26vcmFrRn7/s1600/russia.png"><img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 244px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5408173728407425314" border="0" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEg1SXHw22HtZEk1ZFLC8FH1ju7wqtO12E5F7vHSf3q6X_BnHpg3xJJ2TqfqKu2o-T_PnptQzgD10ALpVhzWOWlkBCD5u7faL9_N1owiSfb_Iak1rXh5glrnzgKFfR8nlrQEJR26vcmFrRn7/s400/russia.png" /></a><br /><br />In contrast the rebound in Russian services activity rose continued in October, supported by a record fall in charges, and Russia's services sector, which accounts for about 40 percent of the economy, rose for the third consecutive month, reaching its highest level since September 2008, although the reading of 54.3 still remained significantly below the long-run series average.<br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjO7-bsh9t5vdpy4oyAliprYXDUBNK2QaJmNE_6yIfI7p0B8XVYpTK8jyU-4U29qYwYJZc3mY8cqq7C04OEWVJ-YHdhywmZKrn54m-U4oSXhvLrUugj_Y5WSawILHT7kzD5_qfe0lw51gZz/s1600/russia.png"><img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 243px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5408174647684182274" border="0" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjO7-bsh9t5vdpy4oyAliprYXDUBNK2QaJmNE_6yIfI7p0B8XVYpTK8jyU-4U29qYwYJZc3mY8cqq7C04OEWVJ-YHdhywmZKrn54m-U4oSXhvLrUugj_Y5WSawILHT7kzD5_qfe0lw51gZz/s400/russia.png" /></a><br /><br /><br /><strong>So Where Do We Go From Here?</strong><br /><br />In contrast to the most recent PMI data and the opinions of analysts like Neil Shearing at Capital Economics and Trust Investment Bank , Russia's political leaders are markedly more optimistic. Russia’s economy may expand as much as 4 percent in the last quarter of 2009 following a timid return to growth in the third quarter, according to Deputy Economy Minister Andrei Klepach speaking at a conference in Moscow recently. The economy may show “quite strong growth” of between 3 percent and 4 percent in the fourth quarter over the previous three months, Klepach said. This is an interesting claim, and doubly so given that Klepach has been quite cautious so far this year in his claims. However, as Neil Shearing at Capital Economics points out Klepach’s claim that growth could rise to an annual 4% at some point is perhaps not as wild as it first sounds. Shearing estimates that output fell by over 9% between Q4 2008 and Q1 2009, which means that given the sizeable base effects which will exist the Q1 2010 year on year growth rate might well look look quite impressive.<br /><br />But this may be a kind of "mirage effect" since if the global recovery slows towards mid-2010 (and with it the level of energy prices) then Russian annual growth could easily fall back sharply over the second half of next year and into 2011. Thus the prospect of a renewed fall in energy prices would imply that the risk a double-dip recession in Russia is quite a real one. <br /><br />But this is all for the future, while here in the present the rising price of oil and the return of some financial flows into Russia continues to fire-up optimism, as do the numbers for retail sales, so we had better just grit our teeth and hope they don't also fire up the inflation process again, although with lending to households still stuck in gridlock, perhaps the dangers here should not be overstated. More worryingly, inflation may fail to fall significantly from its current high level, even as the central bank reduces interest rates in a bid to stem the ruble rise.<br /><br />Klepach's optimism is not shared, however, by the World Bank who in their latest report argue Russia’s economy will suffer a deeper contraction than they previously estimated this year even after a series of central bank interest rate cuts which have manifestly failed to ease the “prolonged” credit drought. The World Bank now expect the Russian economy to contract by 8.7 percent this year, compared with their June forecast for a 7.9 percent decline. The government is currently predicting the economy will shrink 8.5 percent this year and grow 1.6 percent next year.<br /><br /><br /><blockquote>“We expect that the central bank will continue lowering its policy rate in the near future to facilitate credit to the real sector,” the World Bank said. “The impact, however, appears to be limited. The policy rates are mostly indicative, while the cost of credit remains very high.”</blockquote>The OECD, on the other hand, seems rather more positive, arguing that Russia’s economy will enjoy a stronger commodity-driven rebound than first estimated, although, they hasten to add, authorities should avoid a sudden removal of stimulus measures to ensure the domestic economy keeps up the pace of its advance. They now expect the Russian economy to expand by 4.9 percent in 2010, compared with a June forecast for 3.7 percent growth, although output is still expected to contract 8.7 percent this year (broadly in line with the World Bank), more than the 6.8 percent estimated in June. The 2010 figure seems very optimistic in the light of the problems here identified, and more than adding to our appreciation of the Russian situation such numbers may rather cast doubt on the methodology being applied, and raise questions about some of the numbers being seen for other countries.<br /><br /><br /><blockquote>“Although recovery is in prospect, the large output gap and subdued inflation suggest that policy stimulus should not be removed too hastily,” the OECD said. “Fiscal policy should be managed to avoid dislocative demand effects from a surge of expenditures in late 2009 followed by a tightening in 2010.” </blockquote><br />According to the OECD, Russia’s economy will enjoy a stronger commodity-driven rebound than first estimated and “Fiscal and monetary stimulus and the recovery of global demand should result in a strong rebound of output towards the end of 2009". The basic OECD argument is that “A large part of the policy stimulus will be felt only late in the year, as fiscal expenditure is back-loaded and a series of interest rate cuts began only in the second quarter.”<br /><br /><strong>Long Term Impact On Russian Growth</strong><br /><br />But let us not underestimate the difficulties. According to the World Bank Russia’s real GDP will likely return to pre-crisis levels only in late 2012. And, the Bank says, without a more productive, diversified, and competitive economic base, its long-term growth is likely to be slower than in the past decade and than the pre-crisis expectation<br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgBXFiGajMwKf7ObRRCmOLISbTFCLZX-JVGYAzf1H_P9JF9xFTHxxBiUioiF5GNkR7mGB91jFpgs3d98S-z6VZoQkDQfAZkIDT0jsx1YUZzSts-IQ9UmiyvOqgPtGPuYu33oXEMp4K_dsbS/s1600/Russia+Trend+Growth.png"><img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 213px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5408178577978076034" border="0" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgBXFiGajMwKf7ObRRCmOLISbTFCLZX-JVGYAzf1H_P9JF9xFTHxxBiUioiF5GNkR7mGB91jFpgs3d98S-z6VZoQkDQfAZkIDT0jsx1YUZzSts-IQ9UmiyvOqgPtGPuYu33oXEMp4K_dsbS/s400/Russia+Trend+Growth.png" /></a><br /><br />Russia’s pre-crisis decade of prosperity was built on strong capital inflows, rising consumer and corporate credit, and significant capital investment. The post-crisis world will look very different: Russia will need to implement fiscal adjustment and diversify its economy in the context of sluggish global growth, low capital flows, and more limited access to foreign financing. So it is now time to look towards a new growth model based on increases in productivity and know-how and on more efficient allocation and use of investment, labor, and FDI. Next generation reforms should be geared to make Russia's monetary policy instruments much more effective, the Russian economy much more productive, diversified, and open—and more able to respond to future shocks. The success and duration of the transition from the current model of heavy dependence of natural resources to a more sustainable growth model depends, according to the World Bank on maintaining a competitive exchange rate, sustaining a prudent fiscal stance, improving the investment climate, more mobile capital and labor, making the financial sector deeper and more efficient, investing in infrastructure to eliminate key bottlenecks to growth, and strengthening governance and fighting corruption as part of the overall effort to improve the effectiveness of the public sector.<br /><br />The OECD more or less agrees: “Laying the foundations for sustained rapid growth will require unwinding some of the distortive consequences of the crisis". And, may I add, unwinding some of the distortive processes which lead the crisis to be such a severe one in the first place might not be such a bad idea either.Unknownnoreply@blogger.com1tag:blogger.com,1999:blog-7303901362201842397.post-3302711298195557342009-08-15T02:07:00.005+02:002009-09-16T00:02:25.885+02:00Bank Rossii Eases Further As Russia's Economy Contracts At A Record RateRussia’s central bank this week lowered its main interest rates for the seventh time since April 24 - lowering the refinancing rate a further quarter percentage point. The decision came hard on the heels of the announcement that the Russian economy suffered a record economic contraction in the second three months of the year and refelect the growing recognition that the country now faces a painfully slow recovery. Just how painful things might become will form the subject matter of this report.<br /><br />You can also download the full text in PDF if you prefer to print and read - <a href="http://sites.google.com/site/globaleconomicperspectives/macro-economic-reports/RussiaBriefingSeptember2009-Edward.pdf?attredirects=0">Bank Rossii Eases Further As Russia's Economy Contracts At A Record Rate</a>.<br /><br /><strong>Risks Rising On All Fronts<br /></strong><br />Bank Rossii cut the refinancing rate to 10.5 percent from 10.75 percent (following a quarter point reduction on August 10), and lowered the repurchase rate charged on central bank loans to 9.5 percent from 9.75 percent, effective from tomorrow. The bank has now cut the rates six times since April 24. Nonetheless Russia’s benchmark refinancing rate is still the second-highest in Europe, after the 12% on offer in Serbia and Iceland - meaning ruble denominated assets remain an attractive carry pair with either Euro or USD, and that with inflation stuck around the 12% mark the problems for central bank monetary policy are legion.<br /><br /><br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEicc5L7kID4C4SpAdF9MlAXc5idIGymIPjKlTU0omj5rVkG7y6si8I0b7e6H7yTvPwphF9aOVxBqGwRCAy8ZCOQGWdaun4De9axxnxcGnAHDrLdFqyrBLdl3q3DF6Ty3KtrYx23amGEVcmf/s1600-h/russia+interest+rates.png"><img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 231px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5381306991987709234" border="0" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEicc5L7kID4C4SpAdF9MlAXc5idIGymIPjKlTU0omj5rVkG7y6si8I0b7e6H7yTvPwphF9aOVxBqGwRCAy8ZCOQGWdaun4De9axxnxcGnAHDrLdFqyrBLdl3q3DF6Ty3KtrYx23amGEVcmf/s400/russia+interest+rates.png" /></a><br /><br />In the report that follows I will argue how the steady and systematic long term mismanagement of Russia's monetary policy has now created a veritable Procrustean bed of problems for Russia's economy and society. Failure to address the underlying inflation problem between 2005 and 2008 meant that large structural distrortions were accumulated in the economy, including a massive problem of commodity export dependence, a problem which effectively turned the country into a veritable disaster waiting to happen if ever there should be a protracted lull in the secular rise in energy prices. That lull has now arrived, and it is not at all clear just for how long we will all need to get to learn to live with it. <p></p><p>In a more or less reasoned analysis Capital Economics suggest that oil prices could fall back to somewhere around $50 a barrel in 2010. If this forecast proves anywhere near correct, the Russian economy is going to be subject to major downside risks, due to the difficulties posed by:<br /><br />i) financing the fiscal deficit<br />ii) rising unemployment<br />iii) growing bad loans in the banking system<br />iv) refinancing external debt<br />v) the continuing high level of consumer price inflation and the difficulties this poses for monetary policy at the central bank<br /><br />Added to all this, the economy will clearly not rebound as easily as many seem to foresee, adding to the risk element on all fronts. The Russian Economy Ministry seem to be getting ahead of themselves at the moment, since following a period when they have tried to get the bad news all out up front, just last week they decided to raise their 2010 forecast to a growth of 1.6 percent - up from the previous 1 percent forecast. This growth, if realised, would follow an anticipated shrinkage of some 8.5 percent this year, based on the September 9 estimate of Economy Minister Elvira Nabiullina that output may grow 3.9 percent to 4.5 percent in the second half of this year compared with the first six months - such strong optimism I find hard to accept, unless the turnround in global economic activity turns out to be much stronger than the one we are currently seeing.<br /><br /><strong>Is The Worst Really Behind Us?</strong><br /><br />Gross domestic product contracted an annual 10.9 percent in the second quarter, according to the Federal Statistics Service. The headline number represented a worsening in the year on year performance following a 9.8 percent contraction in the first quarter. Evidently the Russian economy has been extremely hard hit by the worst global financial crisis since the Great Depression as demand for Russia’s oil, natural gas and metals (around 80% of total ex-CIS exports), and industrial production plunged as companies depleted stocks and struggled to raise funds during the credit crunch.<br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhlIIWRsqnbFLG80U2cE9RvEjp3Nkk-5XrhacoHGpUbo30THDbzEldiJIbNvd_hULe7AQHeMSFbZ9godLEWZs1ywlclGnHR4BNnC6YoyjmfMG0SW7boQYxHcqP6Y2NUcAHoc-DJrkShWqMz/s1600-h/GDP.png"><img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 230px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5368676977584648370" border="0" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhlIIWRsqnbFLG80U2cE9RvEjp3Nkk-5XrhacoHGpUbo30THDbzEldiJIbNvd_hULe7AQHeMSFbZ9godLEWZs1ywlclGnHR4BNnC6YoyjmfMG0SW7boQYxHcqP6Y2NUcAHoc-DJrkShWqMz/s400/GDP.png" /></a><br /><br />Manufacturing contracted an annual 18.7 percent in the quarter compared with a 23.5 percent drop in the first quarter, while construction was down 20.5 percent in the period following a 20.9 percent annual decline in the first three months. Retail sales fell an annual 11.3 percent, more than twice the pace of decline in the first quarter when they shrank by 4.9 percent. Capital investment slumped by an annual 23.1 percent in May, the most since December 1998. The Russian government forecasts that GDP may fall by as much as 8.5 percent for all of 2009, following growth of 5.6 percent in 2008 and 8.1 percent in 2007. <p></p><br /><p><strong>Looking Into The Third Quarter<br /></strong><br /><br />However the contraction evidently eased in the second three months of the year, and while the Russian Statistics Office do not publish seasonally adjusted estimates of quarterly movements in GDP, Neil Shearing at Capital Economics estimates the economy effectively moved sideways, with roughly zero percent growth (plus or minus a tiny fraction on either side). Moving forward into the thirds quarter, the best measure we have of the current activity level is the GDP Indicator compiled for VTB Capital by Markit Economics on the basis of their Composite PMI. </p><p>Interestingly, the Indicator moved back intopositive territory in August, posting above the neutral level of 50.0 for the first time since last September. That said, the latest reading of 52.2 suggested only a moderate rate of expansion in activity, and remained well below the long-run series average, while both the contry's services and manufacturing sectors posted equally modest month-on-month gains in activity. So we could say the economy continued to move more or less sideways on the month with the quarterly rate still standing at the slightly negative minus 0.2%.<br /><br /></p><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj9RY_2R9wFCOKdLYYMDV7tg6YfWProwH9nBiyHxWBkEUZTN-Ww9_Dg2Rc8l-SLRCztbX_mLIRy_OFJErWENDIfbhkBjlOTh6p8y8TPSnIBK1vCEsb8MWkCG_uET9g1nCES75WBJa98bJ85/s1600-h/GDP+indicator+3.png"><img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 246px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5379504449093906418" border="0" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj9RY_2R9wFCOKdLYYMDV7tg6YfWProwH9nBiyHxWBkEUZTN-Ww9_Dg2Rc8l-SLRCztbX_mLIRy_OFJErWENDIfbhkBjlOTh6p8y8TPSnIBK1vCEsb8MWkCG_uET9g1nCES75WBJa98bJ85/s400/GDP+indicator+3.png" /></a><br /><br />Now while the GDP indicator continued to show quite a strong year on year contraction in August of minus 3.9%, this was well down on May’s revised record rate of minus 9.9%. So while the Indicator has now spent nine months in negative territory - a longer sequence than the earlier seven-month record run from September 1998 to March 1999 - as companies produce direct for new demand, and government stimulus spending has its effect, the rate of contraction has eased notably. But it is worth noting that the current average rate of decline - minus 6.4% - is much sharper than that seen in the 1998 downturn, while we should be asking ourselves, absent a clear rebound in energy prices, just how sustainable the current improvement is.<br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEifsp72tH0VUIlo9ucgzwkreOv-7nxFF8fA78IIMBNIXrZDPpU4T4d-b1zW2d9XHbKy7CZEjbhfBCBgyhJYy-dpz9LIDUL8zFl5KlnJc3T1lo4e6UZeVidkVel_ZJPY47L5XnPFSUEysTw-/s1600-h/GDP+indicator+2.png"><img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 245px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5379504386039800530" border="0" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEifsp72tH0VUIlo9ucgzwkreOv-7nxFF8fA78IIMBNIXrZDPpU4T4d-b1zW2d9XHbKy7CZEjbhfBCBgyhJYy-dpz9LIDUL8zFl5KlnJc3T1lo4e6UZeVidkVel_ZJPY47L5XnPFSUEysTw-/s400/GDP+indicator+2.png" /></a><br /><br />Over the second quarter as a whole, the Indicator averaged a revised annual minus 9.2%, far worse than the annual minus 6.2% posted in Q1. The first two quarters of 2009 have seen steeper contractions than in any previous quarter since the current time series began in June 1998. However,the Indicator does show a slower rate of annual decline for Q3 since the average so far, is minus 5.2% over July-August.<br /><br /><strong>Industrial Output Trending Up<br /></strong><br />Russian industrial production rose for a second consecutive month in July, and the year-on-year decline eased after the central bank cut rates and the government ramped up spending. Output rose 4.7 percent from June, after a 4.5 percent rise the previous month, and on an annual basis declined 10.8 percent compared with 12.1 percent in June, according to the Federal Statistics Service.<br /><br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEixFlEEPjdEyQc-Dvw9FB5QvTnOJJ6hb32BtikSHrGRV_xDUE4WPXRI7U7aiQ7HWdiX0OnBuYdRd25SDg0-bx6wgZjbFrtgUIHw9SufXD-tBv6wEqc9sxTSRAM4cYypANKZnVc_Fu1yL3ew/s1600-h/russia+IP.png"><img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 235px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5379504672715064194" border="0" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEixFlEEPjdEyQc-Dvw9FB5QvTnOJJ6hb32BtikSHrGRV_xDUE4WPXRI7U7aiQ7HWdiX0OnBuYdRd25SDg0-bx6wgZjbFrtgUIHw9SufXD-tBv6wEqc9sxTSRAM4cYypANKZnVc_Fu1yL3ew/s400/russia+IP.png" /></a><br /><br />VTB’s Russian Manufacturing Purchasing Managers’ Index also advanced in August to 49.6 from 48.4 July.<br /><br /><blockquote>“Modest production growth was supported by a second successive monthly increase in new orders, which reflected stronger market activity, particularly at home,” the report said. At the same time, “excess resources remained a key feature,”with “employment, backlogs and inventories all continuing to fall.”</blockquote><p><br /><br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiRgEcB110_xLTMb83M_ivfaLSHsv8cO96lHKd-1lQzb9REaQPDvbw6h4Tr6_H5YMkPRddSsIsLo34BXa1l0dzaErajZDce2RhJMVYSPdbYcNQZvxYokxdTeMDx3T9NYBld1G-_1uYhB7sF/s1600-h/russia.png"><img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 244px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5379505952232016098" border="0" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiRgEcB110_xLTMb83M_ivfaLSHsv8cO96lHKd-1lQzb9REaQPDvbw6h4Tr6_H5YMkPRddSsIsLo34BXa1l0dzaErajZDce2RhJMVYSPdbYcNQZvxYokxdTeMDx3T9NYBld1G-_1uYhB7sF/s400/russia.png" /></a><br /><br />In addition Russia’s services sector returned to growth during August. Both the level of activity and amount of new business rose for the first time since last September, resulting in an overall improvement in the business climate. Employment continued to fall, but the rateof job shedding was at its slowest in ten months. Costpressures intensified again, but remained subdued whencompared against the long-run trend for the survey.<br /><br />The August services PMI rose by 3.7 points, reaching 52.2, ending a ten-month sequence of decline in the service sector. That said, the survey organisers were at pains to point out that the latest figure still pointed to a relatively muted rate of expansion compared to the survey’s long-run trend.<br /><br /><br /></p><p></p><p><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgha5wcajAHOIKoAiSzV94Bxnx08YbBAdnMair103R2m_0t-_l9-d4R98C9OzJuKLD9bvlC3yOarA9OcuvIa9hZOS7Vh5e-MlisJ1zdCtb9F1Q1m2tU-ocI9m7Ljytmf-5O13ve37cB_4i7/s1600-h/russia.png"><img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 244px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5379505831773146866" border="0" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgha5wcajAHOIKoAiSzV94Bxnx08YbBAdnMair103R2m_0t-_l9-d4R98C9OzJuKLD9bvlC3yOarA9OcuvIa9hZOS7Vh5e-MlisJ1zdCtb9F1Q1m2tU-ocI9m7Ljytmf-5O13ve37cB_4i7/s400/russia.png" /></a><br /><br /><strong>As Unemployment Rises, And Incomes Fall, Domestic Demand Shrinks<br /></strong><br />Russia's unemployment rate has been declining recently after reaching its highest level in more than 8 years (8.8%) in April. The unemployment rate continued to decrease in August in all Russia’s 47 regions, according to the latest statement from the Russian Ministry of Health and Social Development. Still, the current 8.2% rate is still very high by Russian standards.<br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgwwIfyPIyC-ExeoIaG_IkmBDHuX5LQWBlFvIzPPIk-QOTMPA1np7ylHIbPCN3zEfi2HpBdq9EUWv964oe2yofALsmo4Nm1A6r23hPetfEEaZdZOcjWXqz42mxR-1aBEPnQtfYCeV6XGQGq/s1600-h/russia+unemployment.png"><img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 202px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5381314845921769298" border="0" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgwwIfyPIyC-ExeoIaG_IkmBDHuX5LQWBlFvIzPPIk-QOTMPA1np7ylHIbPCN3zEfi2HpBdq9EUWv964oe2yofALsmo4Nm1A6r23hPetfEEaZdZOcjWXqz42mxR-1aBEPnQtfYCeV6XGQGq/s400/russia+unemployment.png" /></a><br /><br />Household income which had begun to strengthen following last winters dramatic fall, began to weaken in late spring and was down 5.4% year on year in August, providing additional evidence that the stimulus spending isn't working out exactly as intended.<br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgu5UT2wHFnHRC6Y_KLMOjzYFNwTXk7E_TmtvJC1vHWgd_jyZ1KUPM6YM4iLvsOzPVlUiA1OWpQCqegxen0HNT1RAJDwu2rDXJb6AanIpfop9bGiw03cHeScihzGAWT7hSOjj6DOVJZmV5j/s1600-h/disposable+income.png"><img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 244px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5381314705027646066" border="0" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgu5UT2wHFnHRC6Y_KLMOjzYFNwTXk7E_TmtvJC1vHWgd_jyZ1KUPM6YM4iLvsOzPVlUiA1OWpQCqegxen0HNT1RAJDwu2rDXJb6AanIpfop9bGiw03cHeScihzGAWT7hSOjj6DOVJZmV5j/s400/disposable+income.png" /></a><br /><br />And so, not surprisingly Russian retail sales dropped the most in almost ten years in July, sliding for a sixth consecutive month, as households cut back spending in response to falling income and limited consumer borrowing possibilities. Sales slid 8.2 percent from a year earlier after declining 6.5 percent in June, according to the Federal Statistics Service.<br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhRm8dFXVdtiS3Vsk30NN0vT3dDfRDlLi10qbkrwvuX99G_ZTq8hlB56VuJU8US8Mmzof886Hka8M7puyJjVzja4N6VNrtqtXKF5iRFYBRO7SBAw_sMV3dkR0DEAK8OO_tW2DnxwJyHWhoz/s1600-h/russia+retail+sales.png"><img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 243px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5379505647996283922" border="0" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhRm8dFXVdtiS3Vsk30NN0vT3dDfRDlLi10qbkrwvuX99G_ZTq8hlB56VuJU8US8Mmzof886Hka8M7puyJjVzja4N6VNrtqtXKF5iRFYBRO7SBAw_sMV3dkR0DEAK8OO_tW2DnxwJyHWhoz/s400/russia+retail+sales.png" /></a><br /><strong>Inflation Still The Big Bugbear<br /></strong><br />The best think that can be said about Russian monetary policy instruments is that they are hopelessly ineffictive. Even though August consumer-price growth was probably much lower than July’s 12 percent pace it is still extremely hard to understand how incompetence can have reached such a level that an economy which has been contracting at more than 10 per cent a year can still have double digit consumer proce inflation. There is no other word for it, this is a mess.<br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiQiGE_dYUjLjZbgdO7ujKq1nHKQ3P2CPwFwLxeNkhGZjVdCN8bID1jS07pATno6YP2Wjy5WilG6lUIbtfJBGw2Tp2PugPMZ0DH_ILzXDitchBOkMYz5mTfKe12ToXca4_X0VtGsowAsBrw/s1600-h/russia+inflation.png"><img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 241px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5379548564890177986" border="0" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiQiGE_dYUjLjZbgdO7ujKq1nHKQ3P2CPwFwLxeNkhGZjVdCN8bID1jS07pATno6YP2Wjy5WilG6lUIbtfJBGw2Tp2PugPMZ0DH_ILzXDitchBOkMYz5mTfKe12ToXca4_X0VtGsowAsBrw/s400/russia+inflation.png" /></a><br /><br />Producer prices at least have been falling, and slid again in July for the eighth consecutive month as industrial production slumped and companies competed by discounting products amid waning demand, according to the press release from the State Statistics Service. The price of goods leaving factories and mines was in fact down a record 12.3 percent compared with July 2008 after sliding an annual 9.4 percent in June. The pressure on wages and incomes is thus easy to see. What is not so easy to see is why domestic prices take so long in responding to these signals and the Economic Development Ministry still expects inflation to range from 12 percent to 12.5 percent in 2009 from last year’s 13.3 percent. Stunning!<br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEggW_cfLTdL43Qghv20YMAtNalOyxUrAmZs44vljMnq9qe_Ny8pZhElPdoHmR1zt8_ogvrSZ1VtABlxE3dq8905jhqQVRZsR9q-I_RZBNwMs4UdH1zZlvEhZnCMfIXyMXnOdzYzU61Upidz/s1600-h/producer.png"><img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 242px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5379504526672039490" border="0" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEggW_cfLTdL43Qghv20YMAtNalOyxUrAmZs44vljMnq9qe_Ny8pZhElPdoHmR1zt8_ogvrSZ1VtABlxE3dq8905jhqQVRZsR9q-I_RZBNwMs4UdH1zZlvEhZnCMfIXyMXnOdzYzU61Upidz/s400/producer.png" /></a><br />Now suprisingly one of the biggest problems Russia faces as a result of this very disorderly contraction is a sharp fall in capital investment, which is dropping steadily almost with no relief. Down 18.9% year on year in July.<br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEi8qYYk3oop-CY60N-_AlI-eVTvN-W20VCWqPekx4XnNxn4TRG7Y4_DvywYKjxouKYRywtgKSrRrPX8QwSGdg-sDxeIgqYS_kVt4gWbds1J2bBcB5lBwSQayijx8Z3edT893Kmvrl5oCV5_/s1600-h/fixed+capital.png"><img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 217px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5381314776306373330" border="0" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEi8qYYk3oop-CY60N-_AlI-eVTvN-W20VCWqPekx4XnNxn4TRG7Y4_DvywYKjxouKYRywtgKSrRrPX8QwSGdg-sDxeIgqYS_kVt4gWbds1J2bBcB5lBwSQayijx8Z3edT893Kmvrl5oCV5_/s400/fixed+capital.png" /></a><br /><br />So, as the Federal government pounds in stimulus after stimulus, while oil prices however in the $70 dollar a barrel range, the country now risks returning to a period of entrenched budget deficits that may threaten its credit rating and lead directly to further ruble devaluation. The country faces “still-substantial risks to public finances due to the severe economic contraction” and financial risks linked to “stress” in the financial industry and liabilities of state-run companies, according to Standard & Poor’s analyst Frank Gill. </p><p>According to Gill, if the government fails to rein in the budget shortfall, the credit rating may be cut from its current BBB rating. Russia's budget deficit widened in the first eight months of 2009 to the equivalent of 5.9 percent of GDP, according to Finance Minister Alexei Kudrin following a shortfall of 4.3 percent in the first seven months. The expectation now is that the deficit may come in at around 8.9% of GDP on the whole year.<br /><br />On the other hand the government stimulus plans involve an average outgoing of between 850 billion rubles ($26.8 billion) and 900 billion rubles a month this year following a 1.5 trillion ruble jumpstart in December. In its attempt to plug the gap the government is drawing on its $85.7 billion Reserve Fund and $90.7 billion National Wellbeing fund, which were built on windfall oil revenue, tin order to pay for an “anti-crisis” program that estimated to be worth about 2.5 trillion rubles ($79 billion) you include the tax breaks, central bank lending and all the other multifarious measures.<br /><br />With the Reserve Fund expected to be drained by the end of next year, Russia will need turn to international debt markets for the first time since 1998, and is seeking to raise $17.8 billion from investors next year, according to Alexander Kudrin. This will mean the country’s debt to GDP ration - which is still very, very low by international comparisons - will more than double by 2012, growing from 6.5 percent of GDP in 2008 to 16.4 percent by 2012 according to Finance Ministry estimates. </p><p><br /><strong>How To Get Out Of the Mess</strong><br /><br />Well, one way not to solve the problem would be a ruble devaluation according to European Bank for Reconstruction and Development Chief Economist Erik Berglof. Even while recognising that the country has a very difficult couple of years in front of it, Berglof argues “this (devaluation) is the wrong way to think about the recovery in Russia”.<br /><br />As he says, Russia’s failure to wean itself off its reliance on commodity exports has condemned the country struggling to find economic growth in the face of a large drop in demand for its key export products. “If you want to have a flexible exchange rate, you need to get out of this dependence on commodities,” Berglof said. “It’s a major concern that in the last 10 years Russia has become actually more dependent on commodities. Unfortunately, not much progress has been made.”<br /><br />Well, this is eaxctly the point, and is why I have been arguing over the last two year about how all those wage increases which the Russian administration seemed to rejoice in (since they bought short term popularity) simply fuelled domestic inflation and in the process did untold damage to domestic competitiveness. However it is evident Russia's industries cannot now simply be transformed overnight, and this is where I find a weakness in Berglofs argument, since some remedy is needed to straghten out the distortions and get of commodity export dependence. But what? If it isn't devaluation, then surely we will need to see very substantial wage deflation in order to attract the now much needed inward foreign investment.<br /><br />Of course not everyone agrees with Berglof, and the Russian Association of Regional Banks, whose 450 members include the Russian units of Barclays and Citigroup, has called for a devaluation of as much as 30 percent. Billionaire Vladimir Potanin, realist and owner of 25 percent of OAO GMK Norilsk Nickel, said in recent interview with the Russian Newspaper Vedomosti that the “interests of the economy” will lead the currency to depreciate in the “mid term,” allowing exporters to cut costs and modernize production.<br /><br />Nonetheless energy, including oil and natural gas, accounted for 69.1 percent of exports to countries outside the former Soviet Union and the Baltic states during the first seven months of this year, according to the Federal Customs Service, while metals were responsible for another 12%. So the commodities dependency is massive, and this situation can't be turned round easily.</p><p><strong>Getting Carried Away By Global Liquidity?<br /></strong><br />Bank Rossi are also not 100% convinced by Berglof's reasoning, as witnessed by the fact that they facilitated a 35 percent depreciation in the ruble during the second half of last year (see chart below), and as the collapse in raw material prices and the dramatic change in local credit conditions first pushed Russia's economy into recession the ruble’s trading range was widened to between 26 and 41 against the dollar-euro basket.<br /></p><p><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEi7n40tBh01w_m0uokONopN0748l5PongKQl1YqmFjgUiZx2eie8poqJSIJP0aaPwmzwRu8cOYkDMwHxGbL31sWYdLSDhvIxVyRYNOaxxcdgy1t-Askx3_A0O0HkEZi1NtpMZ2tM9kRtztW/s1600-h/rouble+one.png"><img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 242px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5381413592262744658" border="0" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEi7n40tBh01w_m0uokONopN0748l5PongKQl1YqmFjgUiZx2eie8poqJSIJP0aaPwmzwRu8cOYkDMwHxGbL31sWYdLSDhvIxVyRYNOaxxcdgy1t-Askx3_A0O0HkEZi1NtpMZ2tM9kRtztW/s400/rouble+one.png" /></a><br /><br /><br />However the central bank is now locked on the horns of a massive dilemma, since as risk appetite returns, with it comes the enthusiasm for buying the so called "high yield" currencies - like the South African Rand, the Russian ruble and the Hungarian forint. Instruments denominated in all these currencies offer investors substantial returns at the present time thanks to offering some of the highest interest rates among globally traded currencies.<br /><br />Indeed buying Russian rubles was one of the key recommendations made by Angus Halkett, currency strategist at Deutsche Bank in London, in a research report published back in April, and the market seems to have followed his advice The so-called carry trade works by investors borrowing in currencies with low interest rates and good prospects of continuing depreciation (the USD at the moment, for example) in order to buy higher-yielding assets, in countries with high domestic interest rates and continuing prospects for ongoing appreciation.<br /><br />In general, engaging in one or other form of the thousand-and-one-varieties carry trade is pretty standard practice during times when returns for real economic activity are low, and central banks hold down rates and supply liquidity. Indeed we may include here the kind of carry practiced by banks in borrowing from the central banks only to then lend - for a small, but very low risk, interest rate commission - to their national government, who at this stage in the business cycle will normally be running a fiscal deficit. So more than funding recovery, the watchword at the moment is very much "carry on carrying".<br /><br />But for those on the receiving end, the consequences of so much carry are far from innocuous, since the process simply funds all sorts of economic distortions, and far from allowing normal market corrections to occur, it simply amplifies the problem. And this is exactly what is starting to happen now in Russia. The ruble had its biggest weekly advance in more than three months last week as risk sentiment rose, following industrial output data from China, which is now the world’s second-largest energy user, which simply showed output increased at a faster pace than forecast.<br /><br />As a result the ruble tends to rise as risk sentiment does, and in particular as economic data exceeds consensus expectations, and the currency has now been on an upward trend since mid-August (see chart below), gaining 0.7 percent to 30.6629 per dollar last Friday alone. This was the highest close since July 27. Over the week as a whole the ruble appreciated 3.1 percent, the most since the week ending May 22. So things are now becoming very detached from the so called "fundamentals" (whatever those might be in the topsy turvy world in which we now live), since it simply is not plausible that the currency should be rising in this way in a country with 12 percent consumer price inflation and which badly needs to move away from commodity export dependency. The only conclusion which could be drawn is that the Russian economy now needs massive structural reforms, and on any imaginable scenario in the world in which I live these are simply not going to be implemented.<br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgwyhCoqFXxNG6YB7jaBS4_N0aFYbbl_jGxuSky3V_YYxHoLixwuZDyAvle_OaNMjW2B8odWyKmUe9PLdHDramvrpKjM8lqj7Cz-pmv8__wtshs8Tyo93AIetD95klWVCxksISk9L6k_KeI/s1600-h/rouble+2.png"><img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 242px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5381413495551242706" border="0" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgwyhCoqFXxNG6YB7jaBS4_N0aFYbbl_jGxuSky3V_YYxHoLixwuZDyAvle_OaNMjW2B8odWyKmUe9PLdHDramvrpKjM8lqj7Cz-pmv8__wtshs8Tyo93AIetD95klWVCxksISk9L6k_KeI/s400/rouble+2.png" /></a><br /><strong>Bad Loans About To Surge?</strong></p><p><br />We also need to consider what is going on in the banking system. According to the lastest report from Standard and Poor's Russian banks currently face “increasing system-wide risks” as loan quality deteriorates and borrowers struggle to keeps their heads above water during the record economic contraction.<br /><br />S&P last week downgraded Bank Vozrozhdenie’s credit rating to B+ from BB- and Alfa Bank, Russia’s biggest private lender, was cut to B+ from BB- as a signal to the industry. As the ratings agency indicated, the inability of Russian companies to continue to make their debt payments will more than likely further stifle lending as banks channel funds into building up their reserves. </p><blockquote>“The ratings on Bank Vozrozhdenie broadly reflect the increasing system wide risks in Russia due to the economic recession and deteriorating operating environment,” the S&P analysts said. “The downgrade primarily reflects deteriorating asset quality for Bank Vozrozhdenie, and the entire Russian banking industry, owing to the continuing economic slowdown.”</blockquote>OAO Sberbank, VTB Group and other lenders are also facing a surge in “troubled assets” that may total $213 billion, according to an earlier Standard & Poor’s report in June - with as much as 38 percent of all assets held by Russian banks possibly becoming problematic by the end of 2011. Russia's banks had already set aside 1.5 trillion rubles ($48.9 billion) in July to cover overdue debt, a monthly increase of 7.6 percent compared to a rise of 6.9 percent in June, according to the last statement from Bank Rossii (Sept. 1).<br /><br />Sberbank’s provisions for the rising debt reached 388.1 billion rubles, or 7.1 percent of total lending, as of June 30, according to the bank itself. The share of bad loans in the second quarter jumped to 6.4 percent from 3.5 percent in the first quarter, while year-to-date lending by the bank was only up 0.4 percent.<br /><br />At Bank Vozrozhdenie, S&P's estimate that about 15.7 percent of loans are “under stress,” S&P. The bank, which focuses on lending to small and medium- sized businesses, saw non-performing loans rise to 7.3 percent at the end of the second quarter, compared with 3.4 percent in the first three months of the year.<br /><br />Overdue bank loans in the system as a whole reached 5.5 percent of total lending in July, compared with 5 percent a month earlier, with overdue corporate loans jumping to 5.3 percent in July from 4.8 percent in June. The bank corporate loan books fell by 0.2 percent in July, while lending to households was down 0.4 percent for the sixth consecutive monthly decline.<br /><br /><br /><strong>Russian Outlook</strong><br /><br />In this report we have identified how steady and systematic long term mismanagement of Russia's monetary policy how now created a veritable Procrustean bed of problems for Russia's economy and society. Failure to address the underlying inflation problem between 2005 and 2008 meant that large structural distrortions were accumulated in the economy, including a massive problem of commodity export dependence, a problem which effectively turned the country into a veritable disaster waiting to happen if ever there should be a protracted lull in the secular rise in energy prices. That lull has now arrived, and it is not at all clear just for how long we will all need to get to learn to live with it. <p></p><p>In a more or less reasoned analysis Capital Economics suggest that oil prices could fall back to somewhere around $50 a barrel in 2010. If this forecast proves anywhere near correct, the Russian economy is going to be subject to major downside risks, due to the difficulties posed by:<br /><br />i) financing the fiscal deficit<br />ii) rising unemployment<br />iii) growing bad loans in the banking system<br />iv) refinancing external debt<br />v) the continuing high level of consumer price inflation and the difficulties this poses for monetary policy at the central bank<br /><br />Added to all this, the economy will clearly not rebound as easily as many seem to foresee. The Russian Economy Ministry seem to be getting ahead of themselves here, since only last week they raised their 2010 forecast to 1.6 percent growth from 1 percent. This would follow an anticipated shrinkage of some 8.5 percent this year. Economy Minister Elvira Nabiullina said on Sept. 9 output may grow 3.9 percent to 4.5 percent in the second half of this year compared with the first six months - and this I find hard to accept, unless the turnround in global economic activity turns out to be much stronger than the one we are currently seeing. The consequence of this is that it will still be some years before Russian GDP even gets back to the 2008 level, as Capital Economic's Neil Shearing recently argued (see chart below).<br /><br /><p><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEinNiSoRRiJpZSuZPN5xhJX8ZhcAhHhXNAwpyJ3gYsWI9yLjLtTn35xkVNnOJGayHN1uXJxSiRNqx_wIXSWhTcwZymRw5sdhKSMrKzA-YB6wl5AA7XzSiEMTso0LDey8Ybk82AIax7ss4Wr/s1600-h/shearing.png"><img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 253px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5379504801167262802" border="0" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEinNiSoRRiJpZSuZPN5xhJX8ZhcAhHhXNAwpyJ3gYsWI9yLjLtTn35xkVNnOJGayHN1uXJxSiRNqx_wIXSWhTcwZymRw5sdhKSMrKzA-YB6wl5AA7XzSiEMTso0LDey8Ybk82AIax7ss4Wr/s400/shearing.png" /></a><br /><br />I also agree with Neil that while financing the Russian deficit is unlikely to add to the inflation issues (given the substantial output gap under which the economy currently labours) underlying inflation is bound to remain well above any reasonable comfort zone, and this will complicate policy decisions enormously.<br /><br />Financing the fiscal deficit - which looks set to top 9% of GDP this year and despite some planned fiscal consolidation is unlikely to fall much below 5% of GDP in2011 - is not a major problem for the government, although the issue of which currency to issue the inevitable bonds in will be, since the likelihood of devaluation at some point remains large - Neil Shearing expects the currency to fall by 10% against its dollar/euro basket over the next six months or so, breaching in the process the current lower bound of the trading range, and this it seems to me is a perfectly reasonable expectation.<br /><br />Of course, talk at this point of a return to the sort of chaos we saw in 1998 is certainly premature, especially with debt to GDP only just breaking the double digit frontier. But serious issues do lie ahead in 2010, not least of them how to recapitalise Russia's badly wounded domestic banking system, and how to refinance all the outstanding forex denominated corporate debt. Of course, if we are living a fairytale version of Alica in Dynamic Global Recovery land, then demand for Russia's commodity exports will surge again in 2010 and 2011. But what is we aren't, and demand remains muted, or more financial problems break out on Europe's perfifery? Perhaps the prudent investor will be able to spare the time to give just a little thought to the likelihood of this second, and definitely less apetising scenario.</p>Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-7303901362201842397.post-51958654476430361002009-07-14T18:05:00.005+02:002009-07-15T09:45:56.462+02:00Russia's Contraction Eases But Knife-edge Risks Remain For 2010The Russian ruble strengthened the most in more than three months against the dollar this morning (gaining 1.7 percent to 32.2247 per dollar at one point) as oil rebounded above $60 a barrel and OAO Sberbank reported better-than-expected earnings. Sberbank shares jumped 5.1 percent after first-quarter net income turned out to be above analyst estimates. But the rise was also helped by the fact that Russia’s central bank spent approximately $2 billion from reserves to try to stop the ruble from falling yesterday, taking central bank reserve spending over the two working days since they lowered interest rates half a percantage point on Friday to around $4 billion, <a href="http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aTqgrOY1vdEo">according to reports in the newspaper Kommersant</a>.<br /><br />Russia’s central bank cut its main interest rates for the fourth time in less than three months at the end of last week after the government estimated the economy contracted an annual 10.2 percent in the January-May period. Bank Rossii lowered the refinancing rate to 11 percent from 11.5 percent following on initial reduction on April 24 and two further cuts on May 13 and June 5.<br /><br /><p><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiRqhnoTWy8ERchJCGNmoKIIEmrwien5bhBRSVcFcqddrkiCSjKH6CFLbv0dUR8Ia9B4jcK5ZdhRb6fxxFLDP8VlJ2jJ35Tkp0WpIAcOlGJZR3FziDueVnG5DWpZ-3iR7nnJYJqsLllOJZR/s1600-h/russia+interest+rates.png"><img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 229px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5357679372437962674" border="0" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiRqhnoTWy8ERchJCGNmoKIIEmrwien5bhBRSVcFcqddrkiCSjKH6CFLbv0dUR8Ia9B4jcK5ZdhRb6fxxFLDP8VlJ2jJ35Tkp0WpIAcOlGJZR3FziDueVnG5DWpZ-3iR7nnJYJqsLllOJZR/s400/russia+interest+rates.png" /></a><br /><br />But the striking thing here is that today's ruble surge followed seven consecutive days when it fell - including yesterday when it dropped 0.5 percent against the euro and 0.1 percent against the dollar to hit the lowest close against the central bank's currency basket since May 4. Indeed only last week the ruble posted its steepest slide against the euro and dollar since January as oil prices fell and Russia's budget deficit contined towiden. And to top it all, as I say, the central bank reduced interest rates for the fourth time in less than three months.<br /><br />Indeed just after the rate cut Alfa Bank’s Chief Economist Natalia Orlova commented that she was seeing a “very fragile trend” in the ruble, with a lot of downside potential: and I completely agree with her. What we have is a lot of volatility and a lot of market nervousness. Just this morning Bloomberg <a href="http://www.bloomberg.com/apps/news?pid=20601095&sid=aSY6npP9UTBY">cited a research report from the ING Group</a> warning that "the ruble may drop as much as 5.8 percent to the weakest end of Russia’s target exchange-rate basket as the central bank aims to revive credit by lowering key interest rates by up to 4 percentage points.” (research note <a href="http://data.cbonds.info/comments/2009/39111/2009061316070124_E.pdf">here</a>).<br /><br />My feeling is that a 400 basis-point reduction would have an even bigger impact than even ING expect. Basically central banks in a number of central and east European countries are caught in a kind of trap, where the high level of forex borrowing both households and companies have engaged in makes local monetary policy rather impotent, and worse, this impotence itself becomes a self perpetuating situation. The trap perpetuates itself since people become reluctant to take out local currency denominated loans due to the high interest rate they carry, so they take out either dollar- or euro-denominated ones and thus make matters even worse, making the possibly erroneous assumtion that end game of all this will be either a dollar collapse (the Russian view) or eventual euro membership (in places like Hungary and Romania). Those doing the borrowing thus feel themselves to be completely covered, and fail to take into account the capital loss that could follow a large correction in their own local currency. <br /><br />Slowly monetary policy makers in the most affected countries are coming to recognise that they need to address the issue, and somehow or other to get rates down, since the problem is not going to simply go away, and the meanwhile the respective economies keep on shrinking, with no positive boost from local monetary policy. But it is just when they start to lower rates that things start to turn nasty on them, since the whole situation is non-linear. Supporting a currency with high interest rates works for as long as it does on the win-win dynamic of yield differential AND a rising currency, but once the so called carry trade "punters" get the idea that political pressures to address the economic contraction may force substantial rate cuts on the government and the monetary authorities, and that the expectation of such rate cuts may lead the other "punters" to sell local instruments and exit the market, then the "thinking punter" finds he or she also needs to sell, and this is how we get to see that "will the last one out of the door please turn the lights off" type of self fulfilling herd behaviour.<br /><br />I would say Serbia, Ukraine, Hungary, Romania and Russia are all vulnerable to this kind of outcome. Of course, from a macro economic viewpoint they can all start to bring interest rates down as inflation steadily drops, but I'm not sure that the inflation element is an important consideration for the short term carry-trade people, since it is the absolute yield differential, and the currency dynamics that would seem to matter most.<br /><br /><br /><strong>Sharp GDP Contraction</strong><br /><br />Evidently the background to all this nervousness is last week's announcement from the economy Ministry that Russia’s economy may shrink by as much as 8 to 8.5 percent this year. Gross domestic product probably contracted by an annual 10.2 percent in the first six months and may slump at a 6.8 percent annual rate in the second half, according to the latest Ministry forecast.<br /><br />Behind this drop in GDP lies the fact that Rusia's exports were down by 47.4 year on year in the January to May period, largely due to falling prices for oil and raw materials. The economy ministry also said it expected capital investment to fall by around 21 percent this year as utility and energy companies, which account for about a third of total investment, cut spending programs. The ministry forecast is based on an oil prices scenario of an average $54 a barrel in 2009.<br /><br />Further, industrial production is expected to shrink between 11 percent and 13 percent as manufacturing falls by as much as 17 percent. Inflation of between 12 percent and 12.5 percent is forecast, down from last year’s 13.3 percent. And retail sales are expected to suffer an annual contraction of 5.8 percent.<br /><br /><br />For the 2010 to 2012 period the ministry currently predicts a 1 percent expansion next year, followed by a 2.6 percent one in 2011 and 3.8 percent one in 2012. This “moderately optimistic" scenario would produce a deficit of 6.5 percent in 2010, followed by further deficits of 4 percent and 3 percent over the following two years. Government officials have recently stated they expect Russia to have a budget deficit of around 9% of GDP in 2009, up from an earlier 7.4% estimate. </p><p><strong>Short Term Indicators Show Continuing Contraction<br /></strong><br />Industrial production shrank a record annual pace of 17.1 percent in May, while capital investment fell the most since December 1998, dropping an annual 23.1 percent.<br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjWr5WDn1-mCI9sWSa9myHTrY566wutchETmqeN3g0Uzu7nEbmXUfBFYghHChkuKD5dJgzCWsudhwQaAwSxZAZ3N6z_nMbdW5GMlWPqSxG_j9vRlhaEQy9OfzYu0fcDe_nNrCTRlIDXei9k/s1600-h/russia+IP.png"><img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 235px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5358320679853162850" border="0" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjWr5WDn1-mCI9sWSa9myHTrY566wutchETmqeN3g0Uzu7nEbmXUfBFYghHChkuKD5dJgzCWsudhwQaAwSxZAZ3N6z_nMbdW5GMlWPqSxG_j9vRlhaEQy9OfzYu0fcDe_nNrCTRlIDXei9k/s400/russia+IP.png" /></a>Russian unemployment fell back for the first time in 10 months in May, but despite the positive effect this may produce on confidence the rate is sure to rise further in the months to come.<br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhljEuGy9JSllCX6SADs5mFe9pD9mccTbajUoFw-mkTva5zZYrl2yJrR7wCxlABkcWys41TixPK-PBsEpRjEsdp3fEFD25Hu2t9a1Y3RYW1z7dtoFB42J-EsrxNiVj2h46tztYYY19WG8DF/s1600-h/russia+unemployment.png"><img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 201px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5358320354909822786" border="0" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhljEuGy9JSllCX6SADs5mFe9pD9mccTbajUoFw-mkTva5zZYrl2yJrR7wCxlABkcWys41TixPK-PBsEpRjEsdp3fEFD25Hu2t9a1Y3RYW1z7dtoFB42J-EsrxNiVj2h46tztYYY19WG8DF/s400/russia+unemployment.png" /></a><br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhG_QlqRG7Twwq7rUpGgyrPXtN2dgLVkO2F_ZVhnO7YC2GbT-QbfktvELs3ZNs2d3EZFDgFH6cd6aO55EVXfRE1qvA-12a2ZzBYN_mbxaaTlni_6ws-9Vz0AOt90CrsADX57A-Ec8FsgeCO/s1600-h/russia+retail+sales.png"><img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 242px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5358317518033501906" border="0" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhG_QlqRG7Twwq7rUpGgyrPXtN2dgLVkO2F_ZVhnO7YC2GbT-QbfktvELs3ZNs2d3EZFDgFH6cd6aO55EVXfRE1qvA-12a2ZzBYN_mbxaaTlni_6ws-9Vz0AOt90CrsADX57A-Ec8FsgeCO/s400/russia+retail+sales.png" /></a><br /><br />Retail sales fell the most in almost a decade in May, sliding an annual 5.6 percent, the fourth consecutive decline and the biggest since September 1999. The average monthly wage decreased an annual 3.3 percent in May, while real disposable incomes dropped 1.3 percent.<br /><br /><strong>From Inflation To Deflation?</strong><br /><br />After all the inflation which seems to have become endemic in Russia, deflation would seem to be the most unlikely of scenarios, and indeed it is not the most likely of out comes, given the capacity of the authorities to allow the value of the ruble to fall. However, downward pressure on producer prices is evident at this point, and the cost of goods leaving Russian factories and mines dropped an annual 6.5 percent in May after falling 4.1 percent in April, according to the Federal Statistics Service. Prices rose 0.6 percent from April.<br /><br /></p><p><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjoO6thyphenhyphen2pPINHJTOwhDDz_oBLIRg2kt2-WcBMOlOxsizTiTQFy6g7Zzs18X9RiJ3Tha1N1SH9YuDX8zucYWu50vquUgReu4EBcu4shllEzH921v1YvKbR-Ik0Bs4Y_NPyIkw5PNgJIwWcP/s1600-h/russia+PPI.png"><img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 244px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5346037587379877026" border="0" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjoO6thyphenhyphen2pPINHJTOwhDDz_oBLIRg2kt2-WcBMOlOxsizTiTQFy6g7Zzs18X9RiJ3Tha1N1SH9YuDX8zucYWu50vquUgReu4EBcu4shllEzH921v1YvKbR-Ik0Bs4Y_NPyIkw5PNgJIwWcP/s400/russia+PPI.png" /></a><br />Russia’s inflation rate - which fell to an 18-month low in June - is still far too high. The rate dropped to 11.9 percent from 12.3 percent in May. Consumer prices rose 0.6 percent in the month, the same rise as registered in May. Russia’s inflation rate has averaged more than 14 percent a year since the country’s 1998 default and is certainly one of the biggest headaches facing the country.<br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjPRf-Y2-tUBu1ZB9SAeiBWvhpGGRGMvMu-9A1z-NFXgWvHD7bbcTQMg54pCkWxjPDZCCe1LJW4VZ32Fl6VldCsjELObxAOIp3zB_mEjoBlJF5B5o4yYKe4KKvBdjYlw5eDHAVtLpv1HpxQ/s1600-h/russia+inflation.png"><img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 244px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5358381067700273346" border="0" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjPRf-Y2-tUBu1ZB9SAeiBWvhpGGRGMvMu-9A1z-NFXgWvHD7bbcTQMg54pCkWxjPDZCCe1LJW4VZ32Fl6VldCsjELObxAOIp3zB_mEjoBlJF5B5o4yYKe4KKvBdjYlw5eDHAVtLpv1HpxQ/s400/russia+inflation.png" /></a><br /><br /> </p><p><strong>Some Rebound In June</strong><br /><br />Russia’s manufacturing industry shrank last month at the slowest pace since September, and VTB’s Purchasing Managers’ Index advanced to 47.3 from 45.3 in May. So the rate of contraction is easing.</p><p><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEggz-aqwLXD5R4aH3f2uKP5crHlKhSoXupGQ06SOTT8nMSvG9p90MAe-wXkuXqz8CrAM0nLAbnukPDPCUYMAt1o_p_Ou2o_n2Rv044rCgSFicoy9pOZGF-Tc0QL_aOMCoQdfSP4OShZHjFu/s1600-h/russia+manufacturing.png"><img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 242px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5353406597596906994" border="0" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEggz-aqwLXD5R4aH3f2uKP5crHlKhSoXupGQ06SOTT8nMSvG9p90MAe-wXkuXqz8CrAM0nLAbnukPDPCUYMAt1o_p_Ou2o_n2Rv044rCgSFicoy9pOZGF-Tc0QL_aOMCoQdfSP4OShZHjFu/s400/russia+manufacturing.png" /></a><br />Further Russia's service industries shrank in June at the slowest pace since the contraction began in October, according to the VTB Capital Purchasing Managers’ Index which rose to 49.7 from 46.6 in May.<br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgns7tB5Mxy3DxBJ9iRWZLld-4BgT4nYW5VP6N5UYymDeaZNadGCFHDSSkKklWKGnSsO1-3_FqssNKIfMC40wC-f-vzFp47-ZEY4Z5Re8Dm8Jcc5NOqIObheC45-ahRGwsp2IKGLjZoIepa/s1600-h/russia+services+PMI.png"><img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 245px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5358312615729502802" border="0" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgns7tB5Mxy3DxBJ9iRWZLld-4BgT4nYW5VP6N5UYymDeaZNadGCFHDSSkKklWKGnSsO1-3_FqssNKIfMC40wC-f-vzFp47-ZEY4Z5Re8Dm8Jcc5NOqIObheC45-ahRGwsp2IKGLjZoIepa/s400/russia+services+PMI.png" /></a><br /><br /><br />As a result the VTB Capital GDP indicator showed an annual 6.4 percent rate of contraction in the second quarter following a 5.4 percent decline in the first three months of the year. But output was shown shrinking at a 4.8 percent rate in June (from a year earlier) as compared with 6.8 percent contraction rate in May. <br /><blockquote>“The GDP indicator suggests that the economic decline in the second quarter of 2009 is likely to be similar to, or slightly worse, than in the first quarter,” Aleksandra Evtifyeva, an economist at VTB Capital, said in the report. “However, the prospects for the second half look brighter.” The pace of Russia's economic contraction eased to a 5-month high of 4.8 percent year-on-year in June, compared with a 6.8 percent shrinkage in the previous month, VTB bank's GDP indicator showed on Monday. The June reading "suggests that the economic decline in the second quarter is likely to be similar to or slightly worse than in the first one," VTB Capital senior economist Aleksandra Yevtifyeva said in the report.</blockquote><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgbT7Zfodir4Z5aXoyi7IdvYwYIthbsdfVOj243hnKHjz5DlYBpNNUfp-feqP_8F0On7EsaFZDEY2iWzQ1RlOhbDguv-U-43RH0qJBMKIeD9HwrglwDHTuLhXtPtzP_ij0yspCOLISigcGn/s1600-h/russia+GDP.png"><img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 241px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5358316678657786722" border="0" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgbT7Zfodir4Z5aXoyi7IdvYwYIthbsdfVOj243hnKHjz5DlYBpNNUfp-feqP_8F0On7EsaFZDEY2iWzQ1RlOhbDguv-U-43RH0qJBMKIeD9HwrglwDHTuLhXtPtzP_ij0yspCOLISigcGn/s400/russia+GDP.png" /></a><br /><br /><strong>2009 Contraction In Double Figures?</strong><br /><br />According to the latest report from the World Bank collapsing industrial production, rising unemployment and ongoing capital flight will reduce Russia’s gross domestic product by 7.5 percent this year and restrain “intraregional trade flows and transfers,”. The Bank also highlighted that “Remittances to the broader CIS region are expected to decline for the first time in a decade, by 25 percent”.<br /><br />Neil Shearing of Capital Economics forecasts a contraction of 10% this year, zero growth in 2010 and fears that Russia may be facing a kind of "lost decade", since it may well not recover the 2008 level of output till 2014, and there are still clear downside risks attaced even to this estimate.<br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiEsrcgODEtfUM7xvjW_sqwej_viQo68CqrKOhbba7DoX_vCnDZs405TlvLNJyLFkw_vAF2QgljpT-GzAbJv5P1gh-psyv5UipkwrbQPcwsP8ctQ-SikGTQgtj6pDQWsICM6LNHUCMQqGAx/s1600-h/shearing.png"><img style="TEXT-ALIGN: center; MARGIN: 0px auto 10px; WIDTH: 400px; DISPLAY: block; HEIGHT: 253px; CURSOR: hand" id="BLOGGER_PHOTO_ID_5358383863027670194" border="0" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiEsrcgODEtfUM7xvjW_sqwej_viQo68CqrKOhbba7DoX_vCnDZs405TlvLNJyLFkw_vAF2QgljpT-GzAbJv5P1gh-psyv5UipkwrbQPcwsP8ctQ-SikGTQgtj6pDQWsICM6LNHUCMQqGAx/s400/shearing.png" /></a><br />Shearing identifies three main factors which may contribute to the lost decade. First and foremost, he notes, the banking sector remains under enormous strain. While official estimates put bad debt at around 12% of total loans this year, Shearing thinks the true figure is likely to hit something closer to 20%. On this basis, he estimates that the banking sector could require up to $60bn in additional capital – far more than the $30bn that has so far been allocated by the government.<br /><br />Second, by using so much ammunition this year, authorities leave little scope for further policy stimulus. Monetary policy is somewhat hamstrung as we have seen earlier, and fiscal policy will have to be tightened over the coming years in order to rein in a ballooning budget deficit. Indeed, Laura Solanko of the Finnish Central Bank's Transition Economies Centre calls this "the largest fiscal stimulus ever" in the Russian context.<br /><br />As Solanko points out, the current crisis has hit oil and gas exports particularly hard, leading to a 47% decline in export duties and a 53% decline in proceeds from taxes on natural resource extraction during the first four months of 2009. The drop in general economic activity has further reduced proceeds from all revenue sources. General government revenues in January–April were 20% lower than a year earlier. If current trends continue, Solanko estimates that general government revenues may drop to close to 35% of GDP this year - down from around 50% in 2008.<br /><br />Meanwhile, government expenditure has increased dramatically at all levels. In January–April this year, enlarged government expenditure increased by 23% to RUB 4,140 billion. The expenditure at the core of the Russian fiscal system, the federal budget, increased by an astonishing 37% compared with the same period a year earlier. Even taking the fairly high inflation into account, this equals a 20% increase in federal expenditure in real terms. Relative to GDP, general government expenditure has risen to 37% and federal expenditure to 23% of GDP, against 28% and 16%, respectively, a year earlier.<p>To sum up, public sector expenditure has nominally increased by 23%, and relative to GDP by a whopping 9 percentage points compared with the first four months of 2008. The sheer magnitude of such a fiscal stimulus is huge. During the 1990s, Russia’s public sector shrank dramatically, its GDP share decreasing by 12 percen-tage points to 26% of GDP in 1999. The current fiscal stimulus has shot public expenditure back to the level of the early 1990s.<br /><br />As the automatic stabilisers in the Russian fiscal system are small, the expenditure increase largely reflects expenditure on anti-crisis measures and advance transfers to the regions by the federal government. The government’s anti-crisis measures announced by mid-March 2008 alone would increase federal expenditure by some RUB 2,000 billion, or 15%, in 2009. Roughly half of that is directed to strengthening the financial system, and the other half to supporting the real sector.<br /><br />The current federal budget foresees a deficit of 7% of GDP, a figure only slightly larger than last year’s surplus – and only slightly smaller than the total assets of the Reserve Fund. This im-plies that most of the Reserve Fund will be exhausted by year end and the Russian government will have to reenter the domestic and external bond markets in 2010 at the latest.<br /><br />And we should never forget that Russia remains in the grip of a pretty vicious credit squeeze. Bank lending to companies fell 1.5 percent in May compared with April, while retail loans dropped 1.9 percent. Overdue bank loans reached 4.6 percent of the total in May, versus 4.2 percent a month earlier. And while many Russian corporates may be restructuring their debt, the only deepening their longer term exposure to currency correction risk. As in the case of Moscow-based steelmaker OAO Mechel, who, <a href="http://www.bloomberg.com/apps/news?pid=newsarchive&sid=a62Hm2ruUHq0">according to Bloomberg</a>, just agreed to refinance $2.6 billion of loans in the biggest foreign-debt restructuring by a Russian company since the credit crisis began. Such refinancing is not coming cheap - the rate was 6 percentage points over the London interbank offered rate - but even more to the point this type of restructuring may only to a certain extent postpone the inevitable, since the new debt now becomes due in December 2012. This is fine if everything is all hunky-dory come 2012, but if it isn't.....<br /><br />As the OECD put it in their latest report on Russia<br /><blockquote>“The main threat to credit growth now appears to be solvency problems, arising from the declining capacity of borrowers to repay bank loans,” the bank said in an economic report released today. “The challenge is to maintain capital adequacy and prevent a sharp curtailing of lending flows.”</blockquote><br /><br />Lastly, Neil Shearing points out there remains little external support for the economy. With the global recovery likely to disappoint, export demand will remain weak. Oil could fall to $50pb by early-2010. As ING say:<br /><br />"Oil price dynamics pose additional risks to RUB. Last week, oil prices plunged below the technically important EMA-200 level of US$63/bbl, indicating a potential further drop to US$47-54/bbl. If this happens, the RUB looks destined to weaken as well, given its greatly strengthened correlation with oil prices over the past two quarters".<br /><br />And if oil does drop back to this range, and the ruble does weaken, and non performing loans rise above the 20% mark (pushed by that very same ruble weakening, and the rising unemployment), and the Russian Federal Government has to start issuing bonds in 2010, well watch out, is all I can say, since trouble will surely be in store. This is very much knife edge touch and go stuff from here on in. Grit your teeth everyone.</p>Unknownnoreply@blogger.com3tag:blogger.com,1999:blog-7303901362201842397.post-4587435692991308032009-06-20T12:28:00.000+02:002009-06-20T12:33:18.785+02:00Facebook LinksQuietly clicking my way through Bloomberg last Sunday afternoon, <a href="http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aC4zbsgMD6x8">I came across this</a>:<br /><br /><br /><blockquote><strong>Facebook Members Register Names at 550 a Second</strong><br /><br />Facebook Inc., the world’s largest social-networking site, said members registered new user names at a rate of more than 550 a second after the company offered people the chance to claim a personalized Web address.<br /><br />Facebook started accepted registrations at midnight New York time on a first-come, first-served basis. Within the first seven minutes, 345,000 people had claimed user names, said Larry Yu, a spokesman for Palo Alto, California-based Facebook. Within 15 minutes, 500,000 users had grabbed a name. </blockquote><br /><br />Mein Gott, I thought to myself, if 550 people a second are doing something, they can't all be wrong. So I immediately signed up. Actually, this isn't my first experience with social networking since I did try Orkut out some years back, but somehow I didn't quite get the point. Either I was missing something, or Orkut was. Now I think I've finally got it. Perhaps the technology has improved, or perhaps I have. As I said in one of my first postings:<br /><br /><blockquote>Ok. This is just what I've always wanted really. A quick'n dirty personal blog. Here we go. Boy am I going to enjoy this.</blockquote>Daniel Dresner once broke bloggers down into two groups, the "thinkers" and the "linkers". I probably would be immodest enough to suggest that most of my material falls into the first category (my postings are lo-o-o-ng, horribly long), but since I don't fit any mould, and Iam hard to typecast, I also have that hidden "linker" part, struggling within and desperate to come out. Which is why Facebook is just great.<br /><br />In addition, on blogs like this I can probably only manage to post something worthwhile perhaps once or twice a month, and there is news everyday.<br /><br />So, if you want some of that up to the minute "breaking" stuff, and are willing to submit yourself to a good dose of link spam, why not come on in and subscribe to my new state-of-the-art blog? You can either send me a friend request via FB, or mail me direct (you can find the mail on my Roubini Global page). Let's all go and take a long hard look at the future, you never know, it might just work.Unknownnoreply@blogger.com2tag:blogger.com,1999:blog-7303901362201842397.post-38708590318928557792009-05-26T09:35:00.003+02:002009-05-26T10:23:34.330+02:00The New Orthodoxy Is Upon UsWe seem to be witnessing the arrival of some kind of new financial orthodoxy. The IMF put it like this in the Hungary Standby Loan Report (which by chance I was reading last night):<br /><br /><blockquote>In emerging market countries with debt overhangs, the “Keynesian” effect of fiscal adjustment is likely to be outweighed by “non-Keynesian” effects related to expectations and credibility. Non- Keynesian effects have to do with the offsetting response of private saving to policy-related changes in public saving. In particular, if fiscal adjustment credibly signals improved public sector solvency, a fiscal contraction could turn out to be expansionary, as private consumption rises based on the view that future tax hikes will be smaller than previously envisaged.<br />IMF - Hungary, Request for Stand-By Arrangement, November 4, 2008</blockquote><br /><br />So from Tallinin, to Riga, to Budapest, to Bucharest, the same sonata on a single note is being played, and the message is cut spending and you will expand. Funny how people are not very convinced about this idea in Berlin, London, or Washington. Sounds like <a href="http://krugman.blogs.nytimes.com/2009/02/03/paradox-of-thrift/">they haven't heard about the paradox of thrift either</a>.<br /><br /><blockquote>Consumers are pulling back because they’ve realized that they’re too far in debt. The economy is shrinking in large part because consumers are pulling back. And the result, almost surely, is to leave household balance sheets worse than ever. I can’t do this accurately until the Federal Reserve’s flow of funds data have been updated, but almost without question the ratio of household debt to personal income has been rising, not falling, as consumers try to save more.</blockquote><br /><br /><br />And today we learn that <a href="http://www.ft.com/cms/s/0/acd93144-4944-11de-9e19-00144feabdc0.html">Dmitry Medevdevis is getting the gospel</a> (via the evangelist Alexei Kudrin)and planning his own package of "expansionary" fiscal cuts for 2010.<br /><br /><blockquote>Dmitry Medevdev, Russia’s president, on Monday ordered the government to prepare for a continuation of the economic crisis into 2010, delivering a markedly pessimistic view of the country’s economy and mandating wide-ranging budget cuts until now put on hold.<br /><br />In an address to top government officials on the budget priorities until 2012, the president sided with the fiscal conservatives in an economic debate that has been raging within the Russian government since last autumn, over how much to cut spending in the face of the crisis.<br /> <br />One of the 10 priorities he announced was “transfer to a strict regime of saving budget resources”. This year Russia will run its first budget deficit in the decade, projected at 7.4 per cent of GDP, which is to be funded almost entirely out of official reserves. Monday’s forecasts, which assume a price of oil of $50 per barrel in 2010, put the budget deficit of 5 per cent of GDP in 2010, falling to 3 per cent in 2011.<br /><br />Mr Medvedev’s remarks indicate the consensus view on the economy has been getting more bearish, in line with that of Alexei Kudrin, finance minister, who sees the crisis lasting longer than initial forecasts, which saw growth returning by the end of 2009.<br /><br />Mr Kudrin said lower budgets deficits could only be achieved if the whole system of budget spending was reviewed. “A review of spending, a transition to targeted spending and saving – these are the key words in the next three years,” he said.<br /><br />Aleksander Auzan, an economist and director of the Social Contract Institute in Moscow, said the projections delivered by Mr Medvedev meant that the fiscal conservatives such as Mr Kudrin had won the debate for now.</blockquote><br /><br />Of course, as Krugman points out, the paradox of thrift normally operates in circumstances where monetary policy has been eased so far that interest rates are starting to get stuck around the zero bound, while Bank Rossii has been busy promoting ruble liquidity by pushing interest rates steadily up, although they have been eased slightly of late to 12%, still offering a yield which is very attractive in comparative terms and drawing in a growing crowd of <a href="http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aKGuAETVHRoc">carry traders who are systematically pushing the ruble to ever higher levels</a> and weakening the export potential of Russia's non-oil manufacturing sector in the process.<br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEixJSQB72492322yAxkqT2g5OoYonPK9b_DLgT9UZNOYJorqJa7Hth5xL2ROJT_Jo4sXB5vf-xtxX_gr9ar_WX8i4rV4yN0WbqI5WO_xvsk2L98Cj__XUeTUpkGCJqX5GEeo1c2y4Nl0aEe/s1600-h/russia+interest+rates.png"><img style="display:block; margin:0px auto 10px; text-align:center;cursor:pointer; cursor:hand;width: 400px; height: 229px;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEixJSQB72492322yAxkqT2g5OoYonPK9b_DLgT9UZNOYJorqJa7Hth5xL2ROJT_Jo4sXB5vf-xtxX_gr9ar_WX8i4rV4yN0WbqI5WO_xvsk2L98Cj__XUeTUpkGCJqX5GEeo1c2y4Nl0aEe/s400/russia+interest+rates.png" border="0" alt=""id="BLOGGER_PHOTO_ID_5340043959539456194" /></a><br /><br /><blockquote>Russia’s ruble climbed to a four- month high against the dollar, headed for its longest run of weekly gains in almost two years, as surging oil prices and higher interest rates lured investors to the country. <br /><br />The ruble jumped to as strong as 31.1607 per dollar today, the most since Jan. 14, and is poised for a 2.8 percent gain in the week, its sixth weekly advance and the longest rally since September 2007. The central bank bought the most foreign currency on the market in almost a year this week as it sought to control the advance, said Mikhail Galkin, head of fixed- income and credit research at Moscow’s MDM Bank. <br /><br />The ruble has climbed 16 percent since the end of January amid a 39 percent jump in Urals crude, the country’s chief export blend, and central bank efforts to deter bets against the managed currency. The ruble depreciated 35 percent in the six months to Jan. 31, spurred by Urals crude’s more than $100 slump from a record high and the worst global financial crisis since the Great Depression.<br /><br />Bank Rossii, has been buying foreign currency on the market in a bid to limit the ruble’s volatility, the central bank’s First Deputy Chairman Alexei Ulyukayev said in an interview last week. </blockquote><br /><br />Deustche Bank last week specifically recommended buying Hungarian forint denominated assets - according to the bank the Russian ruble, the Hungarian forint and the Turkish lira are among the most interesting trades at present. At the start of April Goldman Sachs also recommended investors to take advantage of the unique opportunity and use euros, dollars and yen to buy Mexican pesos, real, rupiah, rand and Russia rubles. <br /><br />But we need to be careful here. Kudrin is undoubtedly right, Russia does need to dig herself in for a longish winter. There may well be no global 'V' shaped recovery, and the Russian economy may well have to learn to cut its coat according to its cloth in order to live with oil at prices below the critical levels for Russian stability. But please, oh please, don't let's start fooling ourselves into thinking that applying fiscal and monetary tightening is expansionary!Unknownnoreply@blogger.com5tag:blogger.com,1999:blog-7303901362201842397.post-60384099347237840962009-05-20T10:17:00.001+02:002009-05-21T13:28:14.939+02:00The Russian Government Forecasts A Possible 8% GDP Contraction For 2009Of course, with all these large negative numbers doing the rounds at the moment, we are all in danger of going rapidly dizzy, but some pieces of data still have the power to shock, like this morning's announcement from Russia's Economy Minister Elvira Nabiullina that the economy may shrink as much as 8 percent this year.<br /><br /><blockquote>“The specific contraction numbers could be 4 percent or 6 percent or 8 percent,” Nabiullina said in an interview with Bloomberg Television in Moscow today. “We’re doing various calculations, pessimistic and optimistic. We believe much depends on how efficient we are.”</blockquote>So the Russian Government is still running through the scenarios, and the ministry now promises to submit new growth forecasts by the end of the month, but it is worth bearing in mind that, as recently as last January, the most probable estimate stood at minus 2.2 percent. And the Economy Ministry aren't the only ones with the excel sheets and calculators out - Alfa Bank, Russia's largest private bank, Goldman Sachs, Citigroup and the International Monetary Fund have all revised their 2009 growth forecasts down recently, with Alfa this week cutting its outlook to minus 5.7 percent from an earlier anticipated drop of 3 percent. Nabiullina's deputy, Andrei Klepach, recently described the International Monetary Fund’s estimate for a 6 percent annual drop as “realistic.”<a name='more'></a><br /><br /><strong>Sharp Fall In Q1 GDP<br /></strong><br />Russia's Q1 gross domestic product slumped back by an incredible 23 percent from the last three months of 2008, according to the latest (non seasonally corrected) preliminary data from the Federal Statistics Service.<br /><br /><blockquote>“The big dip in industrial production jumps in your face,” said Tatiana Orlova, a Moscow-based economist with ING Groep NV, who plans to lower her forecast for a 2.7 percent contraction this year. “The government should be worried. It’s very easy to come up with headlines announcing bailout measures, but the situation shows that you have to adjust them. It’s hard to do these thingsfast.”</blockquote><p><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjZBBIzhULOrlkd8JS8I25aQRpAt7DFyqDLGgLMmKjAacupdFbUnQx5MBFmxuEs6z-dlXiC-jgDVt0MiF4QFMTpKDLb1FKAAkUGpd9E3meNT0EaXgbTJvtMWZ7SznXnMp36JF9YAx39YUc4/s1600-h/russia+GDP.png"><img id="BLOGGER_PHOTO_ID_5337279169778095698" style="DISPLAY: block; MARGIN: 0px auto 10px; WIDTH: 400px; CURSOR: hand; HEIGHT: 231px; TEXT-ALIGN: center" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjZBBIzhULOrlkd8JS8I25aQRpAt7DFyqDLGgLMmKjAacupdFbUnQx5MBFmxuEs6z-dlXiC-jgDVt0MiF4QFMTpKDLb1FKAAkUGpd9E3meNT0EaXgbTJvtMWZ7SznXnMp36JF9YAx39YUc4/s400/russia+GDP.png" border="0" /></a><br /><br />Yet despite the very bad first quarter numbers, and the pessimism which currently emanates from the Economy Ministry, a number of recent data points have been rather better (in the sense of less bad) than those were were seeing in January and February.<br /><br />Both the PMIs and the GDP indicator were registering improvement, although the March Index of key economic activities - at minus 12.4% - was not that far off the February low of minus 12.6%, while April's fall in industrial output was the worst to date. </p><p><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjaUn69ky4XVT84mXh0uiH6JImKsrKcjagMEagYnW9dYj-1xHQOWCLsauKKqUm0GMEbFenMQEnppu1u8k2yeQcpcAR1Mk7rD18w0ywZKovDrwDJ2laT45su-6BIzl5iGMVUy8dRbTz9G8FG/s1600-h/russia+key+indicators.png"><img id="BLOGGER_PHOTO_ID_5337513359188263586" style="DISPLAY: block; MARGIN: 0px auto 10px; WIDTH: 400px; CURSOR: hand; HEIGHT: 233px; TEXT-ALIGN: center" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjaUn69ky4XVT84mXh0uiH6JImKsrKcjagMEagYnW9dYj-1xHQOWCLsauKKqUm0GMEbFenMQEnppu1u8k2yeQcpcAR1Mk7rD18w0ywZKovDrwDJ2laT45su-6BIzl5iGMVUy8dRbTz9G8FG/s400/russia+key+indicators.png" border="0" /></a><br />Russian retail sales also fell again in March - at an annual 4 percent rate - registering their biggest decrease since September 1999.<br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEg0uyDDbwE4AiT0RqicesYYDRSrzjcImuskYq8N88h-oXnyV2I25jiGFu2JvgWcmykMzI-Oo1IPWmjyQZMsVtmUtzffknIhLBHaBCXHpfoRCjQWSmjnpSdpUPmgXfDBIWX50KLAwZJ4giR1/s1600-h/russia+retail+sales.png"><img id="BLOGGER_PHOTO_ID_5337515611928462882" style="DISPLAY: block; MARGIN: 0px auto 10px; WIDTH: 400px; CURSOR: hand; HEIGHT: 241px; TEXT-ALIGN: center" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEg0uyDDbwE4AiT0RqicesYYDRSrzjcImuskYq8N88h-oXnyV2I25jiGFu2JvgWcmykMzI-Oo1IPWmjyQZMsVtmUtzffknIhLBHaBCXHpfoRCjQWSmjnpSdpUPmgXfDBIWX50KLAwZJ4giR1/s400/russia+retail+sales.png" border="0" /></a><br /><br /><strong>Services PMI Shows Contraction Weakening<br /></strong><br />Russia's VTB Bank services industries PMI came in at 44.4 last month, compared with 43.9 in March, suggesting some slight improvement in condition from one month to the next.</p><blockquote>“The sector’s performance is still under pressure from the deteriorating business conditions on the back of weakening demand,” Svetlana Aslanova, an analyst at VTB Capital, said in the report.</blockquote><p>While the index declined for the seventh consecutive month, the rebound from December’s record drop of 36.4 continued, with the rate of decline in new orders easing for the third consecutive month after registering a record contraction in January.<br /><br /></p><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEilDGUesQNFkZDm5MDANsVnZhCeRXxUqrPpLQulqUcBn8JyneqwIYkF6MDQZxv__ofwLwl1BHFuf0qi3x7TZtPOiLqh1LTB8ZLGDl0mPUSBKS8xuoBgoQShULh-4YJNMplyH1ImcVI-xZqx/s1600-h/russia+services+PMI.png"><img id="BLOGGER_PHOTO_ID_5332622337688023378" style="DISPLAY: block; MARGIN: 0px auto 10px; WIDTH: 400px; CURSOR: hand; HEIGHT: 244px; TEXT-ALIGN: center" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEilDGUesQNFkZDm5MDANsVnZhCeRXxUqrPpLQulqUcBn8JyneqwIYkF6MDQZxv__ofwLwl1BHFuf0qi3x7TZtPOiLqh1LTB8ZLGDl0mPUSBKS8xuoBgoQShULh-4YJNMplyH1ImcVI-xZqx/s400/russia+services+PMI.png" border="0" /></a><br /><br />And inflationary pressures are weakening, with prices charged by companies declining for the first time since VTB started compiling the survey as providers competed by offering lower tariffs and discounts, the bank. In addition input prices advanced at the slowest pace on record.<br /><br /><strong>The Contraction Softens In April</strong><br /><br />VTB Bank manufacturing PMI continued to signal that the sector remained in a strong downturn in April, although, <a href="http://globaleconomydoesmatter.blogspot.com/2009/05/global-manufacturing-contraction.html">as elsewhere</a>, the rate of decline slowed again (for the fourth straight month) hitting the almost respectable level of 43.4 (in comparison with <a href="http://globaleconomydoesmatter.blogspot.com/2009/05/global-manufacturing-contraction.html">what is being seen elsewhere</a>). This was the highest level in six months, although (in terms of historical comparisons) the latest results provide further evidence that the sector is experiencing a longer and more pronounced contraction than that seen during the financial crisis of 1998. At that time the PMI spent seven successive months in negative territory. In comparison the current run already extends to nine months - and we are still far from the end of the process - and in addition the rate of contraction has been much more pronounced. <p></p><p>According to VTB the largest component of the headline PMI – new orders – showed a weaker rate of decline in April. The rate of contraction in new business has now moderated continuously since hitting a survey record in December. However, new export business declined at a faster rate in April compared to March, suggesting that while the Russian administration's stimulus plan may be having some impact, the devaluation of the ruble is yet to make any real impact, possibly due to the hefty rate of continuing internal price inflation and also due to the sorry state of international trade. </p><p>Worthy of note is the fact that a number of survey respondents linked lower output levels to payment problems at clients as credit conditions remain challenging. </p><p><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjWhHOIrQS1GUpZgiwwcPFieqPK_cF4hyNJZn1w7tX0J0_SBfdFkDdPN1sfXrDZ3TaFlJQdkFjDhxWIwKVcbsc6wyZJhYGXmdyZdcAfg48H4tjb9eMNM9gmn5NWS-4zGZDHsGnywRk-LtPY/s1600-h/russia+pmi.png"><img id="BLOGGER_PHOTO_ID_5331929342784622898" style="DISPLAY: block; MARGIN: 0px auto 10px; WIDTH: 400px; CURSOR: hand; HEIGHT: 244px; TEXT-ALIGN: center" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjWhHOIrQS1GUpZgiwwcPFieqPK_cF4hyNJZn1w7tX0J0_SBfdFkDdPN1sfXrDZ3TaFlJQdkFjDhxWIwKVcbsc6wyZJhYGXmdyZdcAfg48H4tjb9eMNM9gmn5NWS-4zGZDHsGnywRk-LtPY/s400/russia+pmi.png" border="0" /></a><br /><br />Average input costs continued to increase in April, although at a weaker rate than that seen in the previous two months. Energy prices and exchange rate fluctuations were reported by firms to have increased costs, but this was partly offset by pressure on suppliers to discount rates as underlying demand remained weak. VTB reported that competitive pressure in the manufacturing sector was evident in April as firms cut output prices for the fifth time in six months. Manufacturers also continued to cut back their workforces in April, and employment in the manufacturing sector has now fallen continuously since May 2008, and the rate of job shedding remained marked despite easing for the third month running. </p><p><strong>And The GDP Indicator Reflects The PMIs</strong></p><p></p><p>Thus it is hardly surprising to find that the VTB Capital GDP Indicator showed the Russian economy contracting for the fifth month in a row in April, although again at a weaker rate. The indicator showed the economy contacting 4.7 percent year-on-year in April, after shrinking by a record low of 5.4 percent in March. </p><blockquote>"The April PMI surveys suggest that stocks of finished goods were back to their long-run trend, and according to the GDP Indicator the pace of economic contraction already slowed in April", VTB Capital senior economist Aleksandra Yevtifyeva said in the report. "The most encouraging trend in the recent survey is the moderation in unemployment growth in the manufacturing and services sectors........This might lead to some stabilisation in consumption which has shown an increasingly rapid decline in the past two months............Costs are increasing at a lower rate, while prices charged are falling. The latter is particularly important for the services sector, which recorded a drop in prices for the first time in the past seven years". </blockquote><p><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj28ze4y39VxfEgte2eqz8ZD_TLl2euvX3rC_btSGhepibvxutYBISlPyufLldXZq0ITnHChvn_5SE1rIThloIUA9YYk-zrERTNAjrwbgg6iJUAedN_yZiugBc5376Wttv27BZgOLVrDkzb/s1600-h/russia+GDP+Indicator.png"><img id="BLOGGER_PHOTO_ID_5337518758567422082" style="DISPLAY: block; MARGIN: 0px auto 10px; WIDTH: 400px; CURSOR: hand; HEIGHT: 243px; TEXT-ALIGN: center" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj28ze4y39VxfEgte2eqz8ZD_TLl2euvX3rC_btSGhepibvxutYBISlPyufLldXZq0ITnHChvn_5SE1rIThloIUA9YYk-zrERTNAjrwbgg6iJUAedN_yZiugBc5376Wttv27BZgOLVrDkzb/s400/russia+GDP+Indicator.png" border="0" /></a><br /><strong>Inflation Falls Back</strong></p><p><br />Russia’s inflation rate fell more than expected in April, dropping to 13.2 percent after rising in March to 14 percent, and consumer-price growth slowed to 0.7 percent in the month, the Federal Statistics Service said yesterday, compared with 1.3 percent in March. Food price growth slowed to 0.6 percent in the month from 1.7 percent in March, according to the statement. In the year the rate eased to 14.5 percent from 23 percent in April 2008. </p><p><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjqCxS3Qec_f4A_OADTI3sW9jfMjOlRUxYuOW3KJDvTYBRjF-NTqMC5hNeiq2eiIf_VboV5nQkz-VbCIug2StBkb9mpjsFm8Ntno4_kimL0aPsOE8BW7vXBs-bZxKIeg94XU8_97ZwEBFsP/s1600-h/russia+inflation.png"><img id="BLOGGER_PHOTO_ID_5332750683820462082" style="DISPLAY: block; MARGIN: 0px auto 10px; WIDTH: 400px; CURSOR: hand; HEIGHT: 242px; TEXT-ALIGN: center" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjqCxS3Qec_f4A_OADTI3sW9jfMjOlRUxYuOW3KJDvTYBRjF-NTqMC5hNeiq2eiIf_VboV5nQkz-VbCIug2StBkb9mpjsFm8Ntno4_kimL0aPsOE8BW7vXBs-bZxKIeg94XU8_97ZwEBFsP/s400/russia+inflation.png" border="0" /></a><br /><br /><strong>Allowing The Central Bank To Cut Rates</strong></p><p>Russia’s central bank cut its main interest rates for the second time in less than a month last week. The bank cut its rates for the first time since 2007 on April 24. Bank Rossii lowered its refinancing rate to 12 percent from 12.5 percent and adjusted the repurchase rate charged on central bank loans to 11 percent from 11.5 percent.<br /><br /></p><p><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEg-9ywu8SGdSLlYQaF6LZhhR08Fy3M55odXoaxSH6PTrFmRF5m1ZlcKO47GVXZCwyRMBMPMNwvU2ZWVBHUDmUSoAFTNp-FlPt-KFmOoocFw1k1Xc5SVV1sy6THghnqB6LlA1PQ9tK5_1obZ/s1600-h/russia+interest+rates.png"><img id="BLOGGER_PHOTO_ID_5335313162620781250" style="DISPLAY: block; MARGIN: 0px auto 10px; WIDTH: 400px; CURSOR: hand; HEIGHT: 231px; TEXT-ALIGN: center" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEg-9ywu8SGdSLlYQaF6LZhhR08Fy3M55odXoaxSH6PTrFmRF5m1ZlcKO47GVXZCwyRMBMPMNwvU2ZWVBHUDmUSoAFTNp-FlPt-KFmOoocFw1k1Xc5SVV1sy6THghnqB6LlA1PQ9tK5_1obZ/s400/russia+interest+rates.png" border="0" /></a><br /><br /><br />The reduction is only the second since it made two increases in the refinancing rate and four in the repo during last autumn's financial crisis. Borrowing costs were increased to arrest a 30 percent drop in the currency since August, spurred by falling oil prices after investors pulled money out of ruble- denominated assets.<br /><br />Bank Rossii has also said it plans to raise the mandatory reserve requirements for banks by a half-point every month between May 1 and Aug. 1. The requirement currently stands at 0.5 percent for reserves held in rubles and 0.5 percent for bank’s foreign currency reserves. The move seems to signal that the central bank is gradually phasing out the aggressive reserve requirement easing steps it implemented last October in order to relieve banks of ammunition to bet on the ruble’s devaluation. Along with the rate cuts, this suggests that the central bank is confident that inflation will slow. </p><blockquote>“Probably <strong>for the first time in our new history</strong>, we’ll be better than our official target” of 13 percent inflation, First Deputy Chairman Alexei Ulyukayev said in an interview yesterday. As inflation slows, possibly to 11 percent, “we can talk about the continuation of cutting the policy rate.”</blockquote><p>Ulyukayev also suggested it was “probable” the bank would cut the key rates by a total of 1.5 percentage points this year.<br /><br /><strong>Industrial Output Slides At Record Annual Pace In April<br /></strong><br />Russian industrial production fell at a record pace in April. Output dropped an annual 16.9 percent, the sixth consecutive decline and the biggest since the Federal Statistics Service moved to a new methodology in 2003, compared with a 13.7 percent annual drop in March. Production fell 8.1 percent from March, when it was up by 11.1 percent on February. </p><blockquote>“The situation in manufacturing didn’t improve at all,” said Vladimir Tikhomirov, the chief economist at Moscow’s UralSib Financial Corp., before the report. “Companies were still under a big strain to try to attract capital and were diverting a lot of their investment money to repaying current debt. Investment programs had to be postponed.” </blockquote><p><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEijoZNuH4RA1fmAdxbuf4S3O2YyiqJy7k6ojwqE-tmLG_VK_qO0QDzXjcCE9KXXz0sqNUotWSdjFUygUx7ym3OAlWeD_sk3DB9NAw99qas1BFPYHV8eBk0ZM-ydrBZN0HS1Nv3FA-LYAyJX/s1600-h/russia+IP.png"><img id="BLOGGER_PHOTO_ID_5337276310894101954" style="DISPLAY: block; MARGIN: 0px auto 10px; WIDTH: 400px; CURSOR: hand; HEIGHT: 239px; TEXT-ALIGN: center" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEijoZNuH4RA1fmAdxbuf4S3O2YyiqJy7k6ojwqE-tmLG_VK_qO0QDzXjcCE9KXXz0sqNUotWSdjFUygUx7ym3OAlWeD_sk3DB9NAw99qas1BFPYHV8eBk0ZM-ydrBZN0HS1Nv3FA-LYAyJX/s400/russia+IP.png" border="0" /></a>Manufacturing output was down by an annual 25.1 percent in April, up from the 20.5 percent drop registered in March. Cement and brick output fell 34.7 percent and 39.9 percent respectively in April while production of trucks and vans fell 68.1 percent. Car production fell through the floor - dropping an annual 55.9 percent. </p><p><strong>Mixed Signals All Round</strong></p><p><br />Despite some positive indications in April (or should I say, some less negative ones) the April industrial output number is a shocker, and especially the strong fall from March (although this may well not be working day corrected, and remember there was Easter in the middle). This continuing decline in manufacturing is sure to hit employment, and Ford began talks this week with the union at its plant near St. Petersburg to cut the workweek to four days to avoid overproduction, citing an anticipated 47 percent 2009 slump in what is now Europe’s second-biggest car market.<br /><br />In a further sign the contraction may have picked up speed again, Russian producer prices fell by an annual 4.1 percent in April after falling 2.8 percent in March, according to the Federal Statistics Service in Moscow said today, although prices actually rose 2.4 percent from March. This was the fifth consecutive month of year on year price reduction.<br /><br />Obviously a lot now depends on the evolution in oil prices, and Urals crude, Russia’s principal oil export blend, shot up 6.2 percent in April to $49.61 a barrel. However many analysts are question just how sustainable this surge in prices will prove to be given the very large current global capacity overhang. </p><p>Th ruble jumped to its strongest level in four months against the dollar today (Tuesday) as oil rose above $60 a barrel in New York trading. Some analysts, however, pointed to the fact that banks were also buying local currency to repay state loans and make tax payments. Russian banks need to pay back about 181 billion rubles ($5.7 billion) in unsecured loans plus interest by tomorrow, and 408 billion rubles in taxes must be paid by the end of May, according to Evgeniy Nadorshin, senior economist at Moscow’s Trust Investment Bank in a research note. Banks gained access to unsecured loans from the central bank in November as the government sought to bolster liquidity in the financial sector. Lenders have till tomorrow till tomorrow to repay the loans plus yield issued in auctions on April 13, Feb. 16 and on Nov. 17, according to Nadorshin.<br /><br />Another possible reason for the firming of the ruble was pointed to by <a href="http://www.bloomberg.com/apps/news?pid=20601087&sid=a.AMaJIc3VDo&refer=home">Deutsche Bank analysts in a recent research note</a>: the juicy picking to be had from carry - juicy as long as the ruble doesn't change course - given the high yield differential offered by Bank Rossii rates:<br /><br /><blockquote>Currency deals that profit from the difference in interest rates globally are returning to favor on speculation the worst of the credit crisis may be over, spurring investors to buy eastern European assets, Deutsche Bank AG said. The Russian ruble, Hungarian forint and Turkish lira offer investors the best returns in the next two to three months thanks to the highest rates in the region, said Angus Halkett, a strategist at Deutsche Bank in London.</blockquote><br /><br />What this points to is the danger of "lock-in" here. The risk that the Russian central bank may not be able to reduce rates even as the economy contracts and inflation falls, since lowering beyond a certain threshold will almost certainly produce another bout of devaluation, and with it the danger of more conversion of rubles into dollars and general capital flight. This could be called "being stuck up a gum tree".<br /><br />Whatever the reasons - and high central bank interest rates will be one of them - the ruble has now clawed back some 13 percent of its 35 percent devaluation against the dollar in the six months preceding the end of January.<br /><br /><br />The Putin rescue programme does not seem to have worked as envisaged , and according to President Dmitry Medvedev (who may well have his own axes to grind) $9 billion slate of state guarantees “failed” to kick-start lending to strategic companies. The World Bank warned in their March report that a “silent tsunami” of bad debt still threatens to stall a recovery in the world’s largest energy-exporting economy, and as a growing number of companies default on loans, the government may need to provide as much as $50 billion for bank bailouts, more than twice the amount pledged to banks in this year’s budget, according to estimates by analysts from UniCredit's Russian unit.<br /><p></p><p>Finally, one of the reasons for the disparity between the more positive movement in the GDP indicator and the deterioration in general operating conditions may well be that the former does not include the key construction industry. Billionaire Mikhail Prokhorov, Russia’s richest man, said Russian property developers may suffer more as the country slides into the worst economic slowdown in a decade. “The crisis hasn’t hit developers in full yet,” Prokhorov told reporters in Yelets, Russia, on May 15. “The worst is yet to come.” </p><br /><br /><br /><strong>Update</strong><br /><br />Since writing this post I have received two new assessments of the Russian economic situation which are worthy of note. The first, from Renaissance Economics, makes the very valid point that the 14 percent rebound in the ruble against the dollar since January is eroding the competitiveness of non-energy businesses in Russia and risks pushing the country back to a “boom-bust cycle,”. Roland Nash, chief strategist at Renaissance Capital says:<br /><br />“The danger for Russia is a stronger ruble, not a weaker one,” Nash said in an interview from Moscow today. “A weaker ruble definitely helps the non-oil economy and a stronger ruble definitely hurts them.” <br /><br />The other key point about this wouyld be the way the high interest rates on offer to maintain ruble liquidity attract carry trade plays from investors, which artificially sustain the ruble. My own feeling is that the high interest rates have encouraged ruble liquidity, and this is supporting the currency and stabilising the reserves. But, as Renaissance Capital point out, things can't go on like this, since Russia's economy will only keep contracting internally, especially as we get into next year, and they can't keep pumping in fiscal stimulus. So, even though we won't see violent contractions everywhere like we just saw in Q1, 2010 could well be a generally tougher year than 2009, since there will nothing like the same room for fiscal stimulus. Russia's leaders are obviously gambling that oil prices will rebound, but if they don't..........<br /> <br />Neil Shearing from Capial Economics makes the following points:<br /><br /><br />1/. The Central Bank of Russia’s ‘Output Index’ suggests that, if anything, the risks to the government’s preliminary estimate that GDP shrank by 9.5% y/y in Q1 lie on the downside. All told, the economy now looks set to contract by 10% to 15% this year.<br /><br />2/. While Rosstat has released a preliminary estimate of headline Q1 GDP, official figures are not due until early June. This will contain a full breakdown of GDP, but in the meantime the CBR’s ‘Output Index’ gives some sense of the scale of the recent slump in key sectors of the economy. The index measures output in seven sectors - agriculture, mining, manufacturing, utilities, construction, transportation and retail and wholesale trade. Some of the falls in Q1 were stunning. Industrial output dropped by 14.3% y/y, while transportation fell by 17.6% y/y. Meanwhile, retail trade decline at a much slower pace of 1.1% y/y. Overall, the activity index fell by 12.3% y/y, suggesting that the risks to Rosstat’s preliminary GDP estimate may lie on the downside. (See Chart 1.)<br /><br />3/ There is no doubt that Russia is mired in a deep recession. As we have noted before, this has been driven by three predominant factors: a collapse in commodity prices (although this is often overplayed), weaker external demand and a reversal of capital inflows.<br /><br />4/ In addition, three specific factors intensified the downturn in the first quarter of this year. The first was a collapse in trade finance. The second was a sharp drop in business confidence, which caused firms to shut production and run down inventories. And the third was botched attempts by policymakers to prevent the ruble from falling, which exacerbated capital outflows and caused the banking sector to freeze. Firms and households were simply cut adrift from credit markets.<br /><br />5/ A number of commentators have suggested that the dire industrial production data for April, released yesterday, heralds a new phase in the crisis in Russia. (See Chart 2.) While we remain at the bearish end of the forecasters, it is worth noting that recent data have been distorted by an extra working day in March this year compared to 2008. Indeed, the pace of decline in the real economy may now ease as the extraordinary factors mentioned above start to unwind and the government’s fiscal stimulus programme kicks in.<br /><br />6/ Significant risks remain. In particular, while the ruble has rallied over the past six weeks or so, it remains vulnerable to a renewed fall in global risk appetite. We would not rule out a further bout of ruble weakness, with obvious implications for the banking system.<br /><br />7/. There is a big difference between the pace of decline in GDP easing and the economy starting to recover. Manufacturing output could bounce over the second half of this year as firms rebuild stocks. But a sustained recovery in the rest of the economy is dependent on a recovery in capital inflows recover, the restoration of credit flows and a pick-up in external demand. This is unlikely much before the second half of next year. In light of the sharp falls evident in Q1, we now expect GDP to shrink by 10% this year, although we would not rule out a larger contraction of 15% if tensions in financial markets re-emerge. What’s more, in the absence of a strong recovery in the global economy, GDP looks set to contract again in 2010 (our forecast remains for a drop of 1%).<br /><br /><br />Also Paul Krugman, <a href="http://www.bloomberg.com/apps/news?pid=20601100&sid=aUbd7sJLSktQ&refer=germany">speaking as far as I can see at a seminar in Ho Chi Minh city</a>, had the following to say, which I pretty much agree with.<br /><br /><blockquote>“Just about all of the economic indicators out there are suggesting that the free-fall has come to an end, that we’ve stabilized,” <br /><br />“Probably the worst in terms of shocks to the system is over.....The acute stress that we had last fall after the failure of Lehman has been reduced,” he said. “Interest-rate spreads on commercial paper are way down, interest-rate spreads on corporate debt are down a little bit. The spread on interbank lending is down....“I don’t think we’ve hit bottom, but the bottom is not too much further below us,” he said. “My big concern is that we don’t hit the bottom and bounce, we hit the bottom and stay there. It’s not obvious where recovery comes from.”</blockquote><br /><br />It's like someone hit a very sensitive mechanical device with a large sledgehammer, this sent the device reeling under the impact smashing a lot of the works in the process, and now the shock absorbers have done their work and the vibrations are slowing we will be able to assess the true extent of the damage.<br /><br />He also seems to be warning the US dollar can experience a "Japan-style carry" effect.<br /><br /><blockquote>“The U.S. dollar is going to fall quite a lot, or at least significantly,” he said. “The demand for dollars has been temporarily inflated by the crisis. Good news is actually bad news for the dollar. If things stabilize, then the safe-haven demand for dollars falls off.”</blockquote><br /><br />So the second derivitive is falling. We should not see more 10% - 15% annual contraction rates in Russia, but this does not mean GDP will not keep on falling -for how long? This is the part we still don't know. And what will happen to oil prices? Well we don't know that either.Unknownnoreply@blogger.com4tag:blogger.com,1999:blog-7303901362201842397.post-32583257261691251152009-04-07T08:49:00.012+02:002009-04-09T09:21:33.155+02:00Russia's Economy Contracts By 7% In Q1 2009According to Deputy Economic Development Minister Andrei Klepach last week, Russia's economy shrank by 7 percent year on year in the first quarter of 2009, a staggering turnaround for an economy which has just enjoyed eight years of solid oil-fueled growth.<br /><br />"These figures are worse than we expected," Klepach said at a press conference in Kiev,citing preliminary figures. Klepach also stated that net capital outflows reached $33 billion in the first quarter of 2009, following record outflows of $130 billion in the second half of last year.<br /><br /><p><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEi3HUIa9CcVKAmW_YhtfTQFwycEohbRpDMHOJ-FehwLN_7BFP0qlaBRYE7bSPTy-jdSH8Ii-eWlS95wyvM8SfgzVTvlWKANUhMgjiJG-jwrgDgJO5z9CV6VN4wunFCvS8Q6_jGRLYVRWFQQ/s1600-h/russia+gdp.png"><img id="BLOGGER_PHOTO_ID_5321868440380239218" style="DISPLAY: block; MARGIN: 0px auto 10px; WIDTH: 400px; CURSOR: hand; HEIGHT: 229px; TEXT-ALIGN: center" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEi3HUIa9CcVKAmW_YhtfTQFwycEohbRpDMHOJ-FehwLN_7BFP0qlaBRYE7bSPTy-jdSH8Ii-eWlS95wyvM8SfgzVTvlWKANUhMgjiJG-jwrgDgJO5z9CV6VN4wunFCvS8Q6_jGRLYVRWFQQ/s400/russia+gdp.png" border="0" /></a><br />The Russian State Statistics Service have also released official gross domestic product figures for the fourth quarter of 2008. GDP was up 1.2 percent year on year, the worst reading for any quarter since the first quarter of 1999, and down from a revised 6 percent in the previous three months. The World bank are now suggesting that the present slump may be deeper than the one that followed the government debt default and ruble devaluation in 1998.<br /><br />Certainly the data are bleak. Industrial production contracted for a fourth consecutive month in February - falling by 13.2% year on year - as the credit squeeze and falling incomes eroded demand for metals, cars and consumer goods. Retail sales contracted in February for the first time since February 1999. Unemployment was also up, at 8.5 percent in February, the highest level since January 2005.<br /><br />Manufacturing output plunged with the collapse in demand in the last two months of 2008, and it is likely to contract further in 2009. According to Rosstat five of 14 major manufacturing industries reported outright output declines in 2008, with electronics, electrical, and optical equipment hardest hit (-7.9 percent), followed by textile and sewing (-4.5 percent) and by chemicals (-4.2 percent). Most of the dislocation took place in November and December 2008, when total manufacturing output respectively fell 10.3 and 13.2 percent (year-on-year). As credit continues to tighten and demand to fall, manufacturing is likely to contract further in 2009. According to recent statistics, manufacturing output dropped 24.1 percent in January 2009, compared with January 2008, and 18.3 percent in February 2009, compared with February 2008. In February 2009 the most significant declines were registered in the production of electro-technical and optical equipment (-46.6%), other non-metal products (-33.3%), and transport and transportation equipment (-31%).<br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjdniMQ_d3UGBKX-F3614fec5xUMlTOYHoCfdkKvPlDdLvtFPiPceZJfAl3zpThStkw6a2OIwwYbXz_g06TN_0d0y5wT1fx-HdcJmEj9FR_ONjUT26GahhujqItWjTROQTsOFE-ONnukMRT/s1600-h/russia+IP.png"><img id="BLOGGER_PHOTO_ID_5321914536071369826" style="DISPLAY: block; MARGIN: 0px auto 10px; WIDTH: 400px; CURSOR: hand; HEIGHT: 239px; TEXT-ALIGN: center" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjdniMQ_d3UGBKX-F3614fec5xUMlTOYHoCfdkKvPlDdLvtFPiPceZJfAl3zpThStkw6a2OIwwYbXz_g06TN_0d0y5wT1fx-HdcJmEj9FR_ONjUT26GahhujqItWjTROQTsOFE-ONnukMRT/s400/russia+IP.png" border="0" /></a><br /><br /><blockquote>Tighter credit, collapsing global demand, huge global uncertainty, and rising unemployment have hurt both investment and consumption growth in Russia. According to Rosstat, total fixed capital investment grew 9.8 percent in 2008, compared with 21.1 percent growth in 2007. More worrisome is the investment decline by 2.3 percent in the fourth quarter of 2008 (year-on-year), largely reflecting escalating liquidity problems in the banking sector and the resulting credit crunch and a deceleration in consumption growth due to rising unemployment and lower growth. (World Bank Report, April 2009)</blockquote><br /><br /><strong>GDP Indicator Shows 5.4% Contraction in March</strong><br /><br /><br />The latest data we have to hand confirm the ongoing character of the contraction. The Russian economy is thought to have declined by 5.4 percent in March compared with March 2008, according to the latest GDP indicator estimate provided by VTB Capital. The VTB GDP indicator also registered an average 4.4 percent contraction for the first three months of 2009, which would be the worst decline since the economy shrank 5.1 percent in the fourth quarter of 1998. The difference between the VTB estimate and the 7% estimate put forward by Klepach would lie in the fact that the VTB indicator does not include contstruction, and construction activity has declined sharply in recent months, so the two pieces of data are consistent with one another.<br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjLQmunLTThU_ju4CPRXEZCYVQTyqlAiAvRSNy2zizlsovA7JFIJSzwNbN8as6W9-K19fRUaklms-pIsZWnmWjYaVo2E0_U1SiFugDPLNckBbz59dqclPKFlUJuWvPFbkv9NADmER_olrts/s1600-h/RUSSIA+gdp+inic.png"><img id="BLOGGER_PHOTO_ID_5321869021916590242" style="DISPLAY: block; MARGIN: 0px auto 10px; WIDTH: 400px; CURSOR: hand; HEIGHT: 244px; TEXT-ALIGN: center" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjLQmunLTThU_ju4CPRXEZCYVQTyqlAiAvRSNy2zizlsovA7JFIJSzwNbN8as6W9-K19fRUaklms-pIsZWnmWjYaVo2E0_U1SiFugDPLNckBbz59dqclPKFlUJuWvPFbkv9NADmER_olrts/s400/RUSSIA+gdp+inic.png" border="0" /></a><br /><br />Purchasing power has been reduced by lower wages and less access to credit, togther with rising unemployment rates. 6.4 million Russians, or 8.5 percent of the economically active population, were unemployed in February, a 5 percent increase over January and a 20 percent increase on February 2008. The World Bank forecast recently that unemployment would rise to 12% in 2009. <p></p><p>The weakening in retail sales and other consumption indicators is not that surprising given the strength of the contraction, and especially since there is now growing evidence that Russia's employers, in order to make cost savings while maintaining staff levels during financial crisis, are more and more resorting to salary reductions or part-time working schedules. This approach is thought to be being used widely and appears to have much more legitimacy under Russian law than simply telling employees to go home and take unpaid leave. Employers are being advised to take special care when unilaterally modifying major terms and conditions in employment contracts, since although under the Labour Code, changing the terms and conditions of an employment contract is permitted only by mutual written agreement of both parties, there is an exemption from this rule – Article 74 of the Code - which specifies that in the event of a change in organizational or technical working conditions which make it impossible for the previously agreed terms of an employment contract to be maintained, an employer is entitled to unilaterally change such terms on his or her own initiative.<br /><br />As a result of this contraction in output and weakening in the labour market real incomes have declined substantially in Russia since the autumn of 2008. Rising unemployment and worsening enterprise finances (wage arrears have increased considerably) have meant that in the fourth quarter of 2008 alone, real disposable income dropped 5.8 percent year on year, and by 10.2 percent in January 2009 (again year-on-year). And unpaid wages as a share of total enterprise turnover tripled to 0.12 percent in December 2008, compared with August 2008. The stock of wage arrears as of March 1, 2009 (8 billion rubles or about USD 240 million) remains small but is likely to increase as the crisis grows. At the present time such arrears are thought to affect up to 450,000 people, significantly less than 1 percent of total employment. Growth in real wages came to a complete halt in January-February 2009, following double-digit increases in previous years.<br /><br /><strong>Russian Services Contract Less Slowly In March</strong><br /><br />Activity in Russia’s service sector continued to contracted in March, although the seasonally adjusted headline VTB Services Purchasing Managers Index rose to 43.9 in March from 40.0 in February. Since any readings below 50.0 signals contraction, we can see that while Russia's services are still contracting, they are contracting somewhat less rapidly than in earlier months.<br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgUgxNfxQU-3RABTRImcbQ_bEa4bQubAdGsqeWaZHrzpi53hmh0w9Yv7yIj-K4DwhCwzMFrL2A1R1sEJvnL-DJGdeIJ_14DxKjh9NxMsh_oi-Lsb-ljHR1RUqS1u9SjIFGk5-pVvsHrwXcd/s1600-h/russia+services.png"><img id="BLOGGER_PHOTO_ID_5321912318351836114" style="DISPLAY: block; MARGIN: 0px auto 10px; WIDTH: 400px; CURSOR: hand; HEIGHT: 241px; TEXT-ALIGN: center" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgUgxNfxQU-3RABTRImcbQ_bEa4bQubAdGsqeWaZHrzpi53hmh0w9Yv7yIj-K4DwhCwzMFrL2A1R1sEJvnL-DJGdeIJ_14DxKjh9NxMsh_oi-Lsb-ljHR1RUqS1u9SjIFGk5-pVvsHrwXcd/s400/russia+services.png" border="0" /></a><br /><br />Activity and new business both declined for the sixth consecutive month, however the rate of decline in the volume of new business was at its lowest rate since last October. However a survey-record decline in employment was registered in March, with redundancies at their most severe in hotels and restaurants. Firms raised output prices at a weaker rate in March, as input price inflation moderated and pricing power remained weak due to falling demand for services.</p><blockquote>“Surging price competition on the back of weak market demand has urged companiesto tighten their cost cutting programs. Among the measures that have been applied are further redundancies that resulted in the fastest rate of employment contraction in the history of the survey. The input price inflation eased slightly, however, the pressure of utilities charges remains significant,” Svetlana Aslanova, an analyst at VTB Capital, commented on the survey. </blockquote><p><br /><br /><strong>As Does Manufacturing</strong><br /><br /><br />Russian manufacturing contracted at the slowest pace for five months in March as companies reduced their stocks of unsold goods and the decline in new business eased, according to the latest PMI report from VTB Capital. The VTB Purchasing Managers’ Index was at 42 last month after a 40.6 reading in February. Stockpiles of unsold goods fell at the fastest rate since December 2005, according to the survey of 300 purchasing executives.<br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjLGGCsvRrgt-g9u95HJUQe-RqmkaK2TiUdXG7agwS0NejB6HfOOREXy0RQO3NstByioZlhPyiqZIAAGx5vvYFt4Ps6t3VDCEj-3fMDzziKrZnoQJTO7jfjh9xwOh30pRfpwCJhyDK3pS6u/s1600-h/russia+PMI.png"><img id="BLOGGER_PHOTO_ID_5319723948661546834" style="DISPLAY: block; MARGIN: 0px auto 10px; WIDTH: 400px; CURSOR: hand; HEIGHT: 244px; TEXT-ALIGN: center" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjLGGCsvRrgt-g9u95HJUQe-RqmkaK2TiUdXG7agwS0NejB6HfOOREXy0RQO3NstByioZlhPyiqZIAAGx5vvYFt4Ps6t3VDCEj-3fMDzziKrZnoQJTO7jfjh9xwOh30pRfpwCJhyDK3pS6u/s400/russia+PMI.png" border="0" /></a><br /><br /><strong>Inflation Rising Again</strong><br /><br />Russia’s inflation rate rose to a five-month high in March as the weaker ruble boosted import prices. The rate rose to 14 percent from 13.9 percent in February, while consumer prices grew 1.3 percent month on month, compared with 1.7 percent in February.<br /><br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhObD8ZdYJFNrN3agU_PY2ykLDShintyEkExg_0n32GnWUFBvM9krVGIf7Cz24uFGIA42yGIbugmu7T5LUyHOVwnnzqOHMqzMVb_6FSzKZSWs1h4VGJMiPpZQbEiGIBx4t_SUzmEnpZbwUN/s1600-h/russia+cpi.png"><img id="BLOGGER_PHOTO_ID_5321871193566566978" style="DISPLAY: block; MARGIN: 0px auto 10px; WIDTH: 400px; CURSOR: hand; HEIGHT: 238px; TEXT-ALIGN: center" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhObD8ZdYJFNrN3agU_PY2ykLDShintyEkExg_0n32GnWUFBvM9krVGIf7Cz24uFGIA42yGIbugmu7T5LUyHOVwnnzqOHMqzMVb_6FSzKZSWs1h4VGJMiPpZQbEiGIBx4t_SUzmEnpZbwUN/s400/russia+cpi.png" border="0" /></a><br /><br />Inflation was spurred at the start of the year by the weakening ruble, which pushed up import prices, helping the annual rate jump to 13.9 percent in February from 13.4 the month before. The ruble has now lost 29 percent against the dollar since August. The most recent spike in inflation is evidently producing quite a headache for the Central Bank, since chairman Sergei Ignatiev last week that if April's inflation is “significantly less” than it was a year ago, the central bank may consider cutting interest rates for the first time since 2007, giving some kind of monetary relief to an economy which is badly in need of it. Russia’s inflation rate went as high as 15.1 percent last June, and has since come down somewhat from that peak, but really the record of the central bank in containing inflation has been pretty abysmal.<br /><br />Bank Rossii has been forced to raise its refinancing rate twice since last November, to the current level of 13 percent, in an attempt to limit the amount of rubles available to banks and companies and to slow the decline of the ruble against the dollar. On the other hand the central bank may be in danger of excessive optimism at this point, with Ignatiev telling journalists that his expectation was that the economy may pick up within “several months,” thus trying to offer hope that Russia's banks won’t suffer that “second wave” of crisis that Finance Minister Alexei Kudrin said may hit as bad loans eat up capital. I am of the opinion that Kudrin is right to be cautious here.<br /><br />Rising delinquency “is a serious problem, but I don’t share the opinion that a second phase of the crisis is unavoidable,” is Ignatiev's view. Overdue retail loans rose to 4.4 percent as of 1 March from 3.2 percent on 1 September. “I believe the most serious phase of the economic crisis is over," Ignatiev told journalists. Would that he were right, unfortunately I think he is wrong, the worst is still ahead.<br /><br />Obviously the continuing inflation is a problem for Russia's central bank since they would obviously like to offer monetary easing to the economy, just as the U.S. Federal Reserve, the European Central Bank and the Bank of England are doing by bringing their benchmark rates close to zero to bolster banks and pull their economies out of recessions. Bank Rossii last cut the refinancing rate in June 2007, and it has now increased the repurchase rate charged on central bank loans four times since November.<br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjemis8H0y9l3izFFP05lR8twSUStNG-36MEG90HkgZwMgYmpuV99EDubGSASzAPkZX97LT8IwRZd_vPpI_zsJnzcdgYgrKb6izcXLR0WKAuy_2nlpKDU3P1p4CZsrDP1MW6vr3XoNahJxQ/s1600-h/bank+rossii.png"><img id="BLOGGER_PHOTO_ID_5321895890504873122" style="DISPLAY: block; MARGIN: 0px auto 10px; WIDTH: 400px; CURSOR: hand; HEIGHT: 230px; TEXT-ALIGN: center" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjemis8H0y9l3izFFP05lR8twSUStNG-36MEG90HkgZwMgYmpuV99EDubGSASzAPkZX97LT8IwRZd_vPpI_zsJnzcdgYgrKb6izcXLR0WKAuy_2nlpKDU3P1p4CZsrDP1MW6vr3XoNahJxQ/s400/bank+rossii.png" border="0" /></a><br />The refinancing rate, seen as a ceiling for borrowing money and a benchmark for calculating tax payments, is currently at 13 percent after being raised in November and December. The central bank increased the repo rate charged on central bank loans twice in February.<br /><br /><br />Ignatiev admitted that problems with dealing with non-performing loans “could arise", and that he did not "think this is just empty talk,” although he stressed Bank Rossii would seek a solution should the banks be forced to increase reserves to deal with possible losses on loans. Bad loans are still a very low proportion of total debt, nut they are rising. NPLs held by OAO Sberbank, Russia’s largest lender, now make up about 2.8 percent of the bank’s loan portfolio, Chief Executive Officer German Gref last week.<br /><br /><br />Also, on the general economic front the pessimists more or less balance out the optimists. The latest in the pessimist camp, Vladimir Yakunin, head of OAO Russian Railways, said this week that the slowing in the decline of cargo shipments in March doesn’t seem to him to indicate that the country is pulling out of its economic crisis. </p><blockquote>“We are only at the beginning of the crisis and we should wait for better and<br />more solid indications,” Yakunin, chief executive officer at the Russian state<br />rail monopoly which operates the world’s longest rail network, said in a<br />Bloomberg Television interview in his Moscow office today. “We didn’t yet pass<br />the middle point of the crisis.”<br /></blockquote><p><br />Railway cargo turnover fell by 15.8 percent in March from a year earlier, compared with a 32 percent fall in January and a 26 percent decline in February. The data is a “leading indicator of the trend in Russian industry,” according to VTB analysts in their GDP indicator. Yakunin said Russian Railways is “fighting” to limit this year’s cargo turnover drop to 19 percent as it is forced to slow down its development amid falling investment.<br /><br />We also learn this week that Siberian Services, an oil-drilling company among whose clients are to be found OAO Rosneft, has defaulted on $100 million of bonds, thus becoming the first Russian borrower to fail to repay its foreign debt this year. Siberian Services didn’t redeem the 13.75 percent notes due 2010 by an April 3 deadline after bond holders exercised a so- called put option, according to Bloomberg news, citing some of the investors involved.<br /><br /><br />State-owned Finance Leasing skipped an interest payment on $250 million of securities in December, according to Bloomberg. Russian borrowers are struggling to refinance about $100 billion in foreign notes maturing this year as banks reduce lending following $1.3 trillion of losses and writedowns since the start of 2007. </p><p><strong>Conflicting Futures?<br /></strong><br />While the Organization for Economic Cooperation and Development and the World Bank are forecasting that the Russian economy will decline by 5.6 percent and a 4.5 percent, respectively, in 2009, the Russian government is still stubbornly holding fast to its official forecast of a 2.2 percent fall. Publicly government officials are sticking to their view, and diiging in around the idea that they expect a recovery in the final quarter. Deputy Economic Development Minister Klepach said that the government forecast takes into account a package of anti-crisis measures currently being debated by lawmakers that should bolster domestic demand and help boost GDP. Without it, the economy could contract by 4 percent to 5 percent, Klepach noted. </p><p>The Central Bank, on the other hand, continues to forecast a 4.5 percent contraction for the current year. </p><p>The Russian Cabinet approved last month a revised budget containing the first deficit in 10 years. The budget anticipates a deficit of 7.4 percent of projected gross domestic product, but since the current forecast is for a GDP contraction of only 2.2%, the final deficit may be considerably larger. The Finance Ministry is now transfering money from the Reserve Fund to cover the deficit, and anticipates using some 2.7 trillion rubles this year to help fund the budget gap.<br /><br />The Ministry of Finance has released the main parameters of its revised federal budget for 2009 which is based on lower oil prices (USD 41 a barrel, Urals) and a drop in budget revenues from the original 21.2 percent of GDP (under the old assumption of USD 95 a barrel) to 16.6 percent, or RUB 6.72 trillion. At the same time, expenditures will be increased by RUB 667.3 billion to RUB 9.69 trillion, to produce a deficit of RUB 2.98 trillion (about 7.4 percent of GDP), a massive reversal of the fiscal position from the 4.1 percent surplus in 2008.<br /><br />The total consolidated general government deficit is expected to be around 8 percent in 2009 deficit and will be financed largely from the Reserve Fund (7 percent of GDP) with modest domestic borrowing (up to 1 percent of GDP). With a large fiscal deficit, however, and the need to preserve some reserve fund resources for the uncertainty likely to extend into 2010, the space for more fiscal stimulus this year appears limited.<br /><br /><br />So the level of the contraction which the Russian economy undergoes in 2009 really is rather big beer, since it will condition the size of the eventual fiscal deficit, and the percentage of the Reserve Fund which will need to be used this year. If there is no rebound in oil prices in 2010 then Russia's position can complicate on a number of fronts, since the Central Bank Reserves will be significantly depleted, the Reserve fund also, and there may be less room for fiscal easing in the face of potential credit rating downgrades, while monetary easing may also prove difficult given the need to support the currency, and protect Central Bank Reserves. Which brings is back to that “second wave” of crisis that Finance Minister Alexei Kudrin said may hit as bad loans eat up capital. Russian overdue bank loans are increasing by 20 percent a month, according to OAO Sberbank Chief Executive Officer German Gref this week. He also stated that about 3.7 percent of Russian bank loans are currently delinquent, a figure which compares with the 40 percent level hit at the peak of the 1998 crisis. The IMF are already predicting a 10% loan default rate, but at this pace we will hit that level in the autumn, while the 40% rate looms in the spring of 2010, unless there is significant upward movement in oil prices. In fact a Bloomberg survey of 17 bank analysts this week gave a mean estimate that Russian bank bad loans will quadruple to $70 billion this year, with non-performing loans rising to 12.8 percent of the 18.4 trillion rubles ($549 billion) owed by Russian companies and individuals. HSBC Holdings Plc, Europe’s biggest bank, expects delinquencies to reach 23 percent, Europe’s highest rate after Hungary at 25 percent.<br /><br />All in all then, 2010 could be a very hard year for Russia and its citizens.Unknownnoreply@blogger.com6tag:blogger.com,1999:blog-7303901362201842397.post-60215967144543026892009-04-01T16:03:00.003+02:002009-04-01T16:13:05.249+02:00Russian Manufacturing Contracts More Slowly In MarchRussian manufacturing contracted at the slowest pace for five months in March as companies reduced their stocks of unsold goods and the decline in new business eased, according to the latest PMI report from VTB Capital. The VTB Purchasing Managers’ Index was at 42 last month after a 40.6 reading in February. A figure below 50 means a contraction and above 50 implies growth. Stockpiles of unsold goods fell at the fastest rate since December 2005, according to the survey of 300 purchasing executives. <br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjLGGCsvRrgt-g9u95HJUQe-RqmkaK2TiUdXG7agwS0NejB6HfOOREXy0RQO3NstByioZlhPyiqZIAAGx5vvYFt4Ps6t3VDCEj-3fMDzziKrZnoQJTO7jfjh9xwOh30pRfpwCJhyDK3pS6u/s1600-h/russia+PMI.png"><img style="display:block; margin:0px auto 10px; text-align:center;cursor:pointer; cursor:hand;width: 400px; height: 244px;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjLGGCsvRrgt-g9u95HJUQe-RqmkaK2TiUdXG7agwS0NejB6HfOOREXy0RQO3NstByioZlhPyiqZIAAGx5vvYFt4Ps6t3VDCEj-3fMDzziKrZnoQJTO7jfjh9xwOh30pRfpwCJhyDK3pS6u/s400/russia+PMI.png" border="0" alt=""id="BLOGGER_PHOTO_ID_5319723948661546834" /></a><br /><br /><blockquote>“Stocks of unsold goods declined which, combined with a sluggish contraction of the new business sub-index, suggest that the headline index may keep rising into the second quarter,” Dmitri Fedotkin, a VTB economist, said in the statement. Still, “no sharp recovery” in the index is to be expected. </blockquote><br /><br /> <br /><br />The index showed contraction for the eighth straight month, a longer period of decline than the one registered in 1998, when the government devalued the ruble and defaulted on $40 billion of debt. <br /><br /><blockquote>The manufacturing workforce shed jobs for the 11th month in a row, the longest period of contraction in the survey’s history, VTB said. “Firms reported that the redundancies resulted from lower workloads and the subsequent need to cut spare capacity,” it said in the statement. </blockquote><br /><br />OAO Severstal, Russia’s biggest steelmaker, plans to cut as many as 9,500 jobs at its Russian units, Chief Executive Officer Alexei Mordashov said on March 11. The metals industry as a whole could cut as many as 60,000 jobs this year, or 5 percent of the workforce as demand and prices slump, the Industry and trade Ministry said.Unknownnoreply@blogger.com3tag:blogger.com,1999:blog-7303901362201842397.post-57695530498388615432009-03-17T08:26:00.003+01:002009-03-23T23:45:38.739+01:00Russia's Contraction Slows In FebruaryNews from Russia's crisis stricken economy has certainly been a lot less dramatic of late, but even as <a href="http://www.prime-tass.com/news/show.asp?topicid=58&id=453811">Finance Minister Alexei Kudrin seeks to reassure us</a> that everything is coming back under control and that lending in the Russian economy is "in full swing" once more, doubts remain. Are we simply seeing the temporary impact of all those stimulus measures that have been put into place, or is a more general recovery possible at this point?<br /><br />Certainly if we come to look at the purchasing managers indexes we can see that things were better in February than in January. The VTB services index rose to 40 in February from 36.8 in January, although since any reading under 50 indicates contraction, it is clear that Russia's services industries are still shrinking at a pretty hefty rate.<br /><br /><br /><p><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhbpUB6SGDxdhdHf6ykkWIGOOZ1oAmj6mZFvHCe8XjNInZ-k1Bbo5wlFQwHfKrpx1ywiV4kcIE5a2pK8tucs0qkrGwZ9gy2ibkhBGlvURDkbfYKAIp-LHTJV1SAsrG1hyphenhyphenE35Bg25n_mn96A/s1600-h/russia+services+pmi.png"><img id="BLOGGER_PHOTO_ID_5309231233172397810" style="DISPLAY: block; MARGIN: 0px auto 10px; WIDTH: 400px; CURSOR: pointer; HEIGHT: 243px; TEXT-ALIGN: center" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhbpUB6SGDxdhdHf6ykkWIGOOZ1oAmj6mZFvHCe8XjNInZ-k1Bbo5wlFQwHfKrpx1ywiV4kcIE5a2pK8tucs0qkrGwZ9gy2ibkhBGlvURDkbfYKAIp-LHTJV1SAsrG1hyphenhyphenE35Bg25n_mn96A/s400/russia+services+pmi.png" border="0" /></a><br />The manufacturing PMI also improved slightly, rising to 40,6 from January's record low of 34.4.<br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjT6HQhQFZ1W2PdKMNHRNAQiupBGKojySEW_Pzp7NR7Rnv42wlsOmJb8u7PF5AKjuIQIyroQYJkf4JmVMLvCt-n7PbJdMhNMv795ke3m63XCST9byNZPGPSb6K-mWxebyQ1-T3g9Rq19ced/s1600-h/russia+manufacturing+PMI.png"><img id="BLOGGER_PHOTO_ID_5314280278776958210" style="DISPLAY: block; MARGIN: 0px auto 10px; WIDTH: 400px; CURSOR: hand; HEIGHT: 245px; TEXT-ALIGN: center" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjT6HQhQFZ1W2PdKMNHRNAQiupBGKojySEW_Pzp7NR7Rnv42wlsOmJb8u7PF5AKjuIQIyroQYJkf4JmVMLvCt-n7PbJdMhNMv795ke3m63XCST9byNZPGPSb6K-mWxebyQ1-T3g9Rq19ced/s400/russia+manufacturing+PMI.png" border="0" /></a><br /><br />This impression gained from the PMIs is also confirmed by the latest data for Russian industrial production, which dropped an annual 13.2 percent in February, the fourth month of decline, but still rather better than January's 16% decline.<br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhKYaNpiYY7cWFGE4lgziYCh1P9VodJAxV7yDmuKobwONTcKKOqmmNI6gPkkQqckWZw_eO4TO5NX1tOXbXSjSIUUAJuRIbE_ow70KuZTONJruuA16JIyMXeaKK7hobzGE9DJ5uxz0hOhucF/s1600-h/russia+IP.png"><img id="BLOGGER_PHOTO_ID_5314276748850109138" style="DISPLAY: block; MARGIN: 0px auto 10px; WIDTH: 400px; CURSOR: hand; HEIGHT: 238px; TEXT-ALIGN: center" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhKYaNpiYY7cWFGE4lgziYCh1P9VodJAxV7yDmuKobwONTcKKOqmmNI6gPkkQqckWZw_eO4TO5NX1tOXbXSjSIUUAJuRIbE_ow70KuZTONJruuA16JIyMXeaKK7hobzGE9DJ5uxz0hOhucF/s400/russia+IP.png" border="0" /></a><br /><br />And there are other signs of stabilisation, since job losses are now flatlining at 300,000 per month, while nominal wages have risen from January's eight month low. Even a 14.1 percent fall in capital investment in January was less than expected.<br /><br />However, whatever the improvements, the Russian economy continues to contract, and the February reading for the Markit GDP Indicator fell to an annual contraction of 4.7%, down from a revised 2.9% drop in the first month of the year.<br /><br />And indeed the contraction may be even sharper, since Economy Minister Elvira Nabiullina informed the Russian government last week the Russia's gross domestic product is likely to contract by 7 percent year-on-year in the first quarter, according to Ministry estimates. However the ministry is still sticking to its forecast for a full-year contraction of just 2.2 percent, suggesting they continue to hope for a dramatic turnaround in the second half of the year.<br /><br /><br />So the data we now have to hand for the first two months of 2009 point to a further outright contraction over the first quarter, following on the back of the sharp growth downturn in the final quarter of last year. The PMI-based Indicator of year-on-year GDP has now fallen continuously since hitting 7.4% last June and has been in negative territory for the past three months.<br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEg0FAdELNnYhQd97MhaJB-SHTDvK7wFP9FIZUJ056xjpeTYtkj9v8SokDvh3w64Id4i7-pyGyM4k3G36HKHEI4RIvh60x09b6lQXo-mvOSut9LbC8JSfHh-vVNC-4rCyCmCNd8hIXu-U0tq/s1600-h/russia+GDP+indicator.png"><img id="BLOGGER_PHOTO_ID_5310180598846004370" style="DISPLAY: block; MARGIN: 0px auto 10px; WIDTH: 400px; CURSOR: pointer; HEIGHT: 245px; TEXT-ALIGN: center" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEg0FAdELNnYhQd97MhaJB-SHTDvK7wFP9FIZUJ056xjpeTYtkj9v8SokDvh3w64Id4i7-pyGyM4k3G36HKHEI4RIvh60x09b6lQXo-mvOSut9LbC8JSfHh-vVNC-4rCyCmCNd8hIXu-U0tq/s400/russia+GDP+indicator.png" border="0" /></a> </p><p>The Total Activity Index rose to 38.8 in February from 32.1 in January, indicating a further sharp decline in output, although this was the weakest rate of deterioration since last October. </p><p>Russia's economy will contract 2.2 percent this year after 5.6 percent growth in 2008, according to Economy Ministry estimates, and the government anticipates a budget deficit equal to 8 percent of gross domestic product, its first in a decade.<br /><br />However a number of factors lead towards the conclusion that this estimate for 2009 GDP growth may be rather over optimistic. Only today Ford Motor Co., whose Focus is the top-selling western car in Russia, cut its industry forecast for the country, saying sales may plummet as much as 50 percent this year in what used to be their second-fastest growing auto market. Ford, which stopped production at its St. Petersburg plant for one month from mid-December to mid-January, is looking at further adjustments to “plan realistic inventories,” according to the company statement.<br /><br />Russian car sales in the first two months of 2009 were down 36 percent to 252,314 vehicles.<br /><br />The Russian government has responded to the fall in car sales by pledging to spend about 220 billion rubles to aid the industry, offering to subsidize loans on car purchases and making plans to upgrade at least 12 percent of the federal car fleet. The government also raised import duties on cars and trucks to encourage domestic production.<br /><br />On another front Russian wage arrears climbed by 16 percent in February, the second consecutive month that this figure has risen. Total unpaid wages were 8.09 billion rubles ($235 million) on March 1 following a 49 percent in January, according to the Federal Statistics Service. Half a million people were affected by the delayed payments, with 47 percent of the money overdue coming from the manufacturing sector. The unemployment rate rose 8.1 percent in January, the highest level since March 2005, with the total number of unemployed up by 300,000 and reaching 6.1 million people. <br /><br /><strong>List Of Companies Approved</strong><br /><br />The work of trying to contain the damage continues on an almost daily basis. Earlier this week it was announced that Russia’s Trade and Industry Ministry have approved a list of 600 companies who may apply to receive state funds during the economic decline. The ministry, whose budget before the crisis reached 120 billion rubles ($3.59 billion), is already “actively” involved with a third of the companies on the list.Unknownnoreply@blogger.com1tag:blogger.com,1999:blog-7303901362201842397.post-27394966597559116152009-02-25T14:21:00.004+01:002009-02-25T14:31:48.866+01:00Russia's Economy Declines At An 8% Annual Rate In JanuaryRussia’s economy contracted at an annual rate of 8.8 per cent in January, according to the latest statement by the Russian economy minister. This data point, which provides us with the latest confirmation that a very sharp contraction is now taking place in Russia, follows last week's announcement by economic development minister Elvira Nabiullina, economic development minister, that the economy shrank by 2.4 per cent between December and January. Industrial production also fell 16 per cent year-on-year in January, while there was a 17 per cent decline in construction.<br /><br />It also gives us some indication of the viability of VTB’s Russian GDP Indicator (<a href="http://russiatooat.blogspot.com/2009/02/russias-finances-and-economy-look.html">as posted here</a>) which indicated a year on year rate of contraction of 4 percent in January, down from December’s 1.1 percent decline, and November's 2.1 percent expansion. This is somewhat under the actual reading, but it is an estimate in real time (we got this at the start of February) and it was by far the nearest estimate I have seen.<br /><br /></p><p><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjSSvHzOeZjUKCl-_7njoYO5BU428qUhwpZKfqkF7FHlu-kUvotf0Kx-D2m5d60WFb2FI0RNgJK3VrA8YzjZkni0tx9h6_TR1IL-ry7ianKHaDzhLeeVWLzoME9_0i6s8U2btSuEwgCFvMA/s1600-h/russia+gdp2.png"><img id="BLOGGER_PHOTO_ID_5299277342878981762" style="DISPLAY: block; MARGIN: 0px auto 10px; WIDTH: 400px; CURSOR: hand; HEIGHT: 244px; TEXT-ALIGN: center" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjSSvHzOeZjUKCl-_7njoYO5BU428qUhwpZKfqkF7FHlu-kUvotf0Kx-D2m5d60WFb2FI0RNgJK3VrA8YzjZkni0tx9h6_TR1IL-ry7ianKHaDzhLeeVWLzoME9_0i6s8U2btSuEwgCFvMA/s400/russia+gdp2.png" border="0" /></a><br /><br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgKf76VrYoqdLo8UyiePyDiUbpxBYtvVxT3H6B1Exfx2WQHsjpVttGpeF2-XmHPYBQdnODZN83Tz4w9tY-7Yq-7-HhhRmsobyPMCE54DqN2r1E1LsR6zIo0_hM_hVggZdVwAnUx_AAH-o7F/s1600-h/russia+GDP.png"><img id="BLOGGER_PHOTO_ID_5299277019154031282" style="DISPLAY: block; MARGIN: 0px auto 10px; WIDTH: 400px; CURSOR: hand; HEIGHT: 245px; TEXT-ALIGN: center" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgKf76VrYoqdLo8UyiePyDiUbpxBYtvVxT3H6B1Exfx2WQHsjpVttGpeF2-XmHPYBQdnODZN83Tz4w9tY-7Yq-7-HhhRmsobyPMCE54DqN2r1E1LsR6zIo0_hM_hVggZdVwAnUx_AAH-o7F/s400/russia+GDP.png" border="0" /></a> </p><br /><br />In its official estimates, the economy ministry said the global downturn was filtering deeper into the real economy and had begun to weigh heavily on ordinary citizens.<br /><br /><blockquote>"Among the negative consequences of the deepening crisis, we can now count a notable drop in the population's real income growth (6.7 percent), increasing unemployment and, as a result, falling consumer demand," the ministry said. "The most important reasons for the economic fall of January 2009 is the significant fall in industrial production, the decline in investment activity, a drop in construction and slowing consumer demand."</blockquote><br /><br />Among the hardest-hit segments, the ministry cited fertiliser producers, which cut output by 42 percent, while tyre producers reduced their output to almost zero. Car production also fell, by 80 percent, and the ministry cited lack of cheap car loans amid a general decline of personal income and excessive production in 2008. Retail sales and agriculture still remained in positive territory areas which were still growing - at 2.4 percent and 2.6 percent respectively - although they are already down sharply and there is evidently more to come.<br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhrNGBO3buuJzrl0_8Tr7Hds1wzcDlG1mCG6HdWyNcnT2uXGz1GP6bT2_rzv9Y7_DOIMqv7K9P548LMGx42ogXHtUqY8dKZ_aTiWhhNLdSkkfBVp3um-O8WCRYcESNL9-E0DXxcapUSHGq8/s1600-h/Russia+IP.png"><img id="BLOGGER_PHOTO_ID_5303458788547091266" style="DISPLAY: block; MARGIN: 0px auto 10px; WIDTH: 400px; CURSOR: hand; HEIGHT: 239px; TEXT-ALIGN: center" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhrNGBO3buuJzrl0_8Tr7Hds1wzcDlG1mCG6HdWyNcnT2uXGz1GP6bT2_rzv9Y7_DOIMqv7K9P548LMGx42ogXHtUqY8dKZ_aTiWhhNLdSkkfBVp3um-O8WCRYcESNL9-E0DXxcapUSHGq8/s400/Russia+IP.png" border="0" /></a><br /><br />Exports fell more than 40 percent to $20.2 billion as the country exported less oil and gas at lower prices, while imports fell by a third to $10.3 billion as a 35 percent rouble devaluation, which continued throughout January, started hitting importers. Consumers of heavy machinery reduced purchases of foreign equipment by 47 percent and food and chemical imports fell by 25 and 29 percent, respectively.<br /><br />All of this, of course, has quite serious implications for Russia's public finances, and the budget deficit is now projected to reach 8% of GDP in 2009, according to Nabiullina, who said the figure took into account so-called quasi-budgetary expenditures in the form of subordinated loans to business, which would (in principle) be repaid at a later date. The federal budget for 2009 originally set expenditures at 9.024 trillion rubles ($250 billion at current exchange rates) and revenues at slightly over 10 trillion rubles ($277 billion), but the drop in oil prices has cut the expected income dramatically. <br /><br />The budget was based on an average oil price of $95 per barrel for the year, but is being recalculated based on a figure of $41 per barrel.Unknownnoreply@blogger.com5tag:blogger.com,1999:blog-7303901362201842397.post-82535264464554715322009-02-07T09:45:00.004+01:002009-02-09T14:09:58.417+01:00Russia's Finances and Economy Look Nervously Towards The Abyss<blockquote>“A significant amount, if not all, of the speculative attacks on the ruble are funded by the central bank itself,” said Vladimir Osakovsky, Moscow-based economist for UniCredit</blockquote><p>The underlying dynamics of the current ruble devaluation are provoking more than a little consternation in Russia at the moment. In the forefront of the debate are data from Bank Rossii (the central bank) which show they lent 7.7 trillion rubles ($214 billion) in overnight and seven-day loans (secured with bonds or other collateral) in just 16 trading days last month - this was about double the 4.8 trillion rubles provided via so-called repurchase auctions in December. Over the same period the ruble lost 18 percent against the dollar. The question is, is there a connection here?</p><p>Russia's banking authorities now certainly seem to think there is and Kommersant reported (Friday) that policy makers planned to reduce bank loans in an attempt to limit bets on the ongoing ruble devaluation. As a result the ruble remained safely within the target band all day Friday, and there was no need for any kind of intervention.</p><p></p><p>The decision follows several days of severe criticism over the way in which Russian banks appeared to be using the loans being made available to them. Oleg Vyugin, former deputy central banker and currently chairman of MDM Bank has suggested that Russia's banks have now accumulated about $40bn in hard currency deposited for their clients on accounts with the central bank and another $40bn on accounts held with foreign banks. </p><blockquote>Policy makers lifted the rate on overnight and seven-day loans obtained through the auctions by 1 percentage point to 11 percent this week, the highest since at least November 2007. Banks used “almost all” the money from loan auctions to bet against the ruble, Natalia Orlova chief economist at Alfa, Russia’s largest non-government bank, said. Policy makers “have basically fueled the speculation on the ruble themselves.....The market is intent on testing the central bank’s ability to spend reserves and they’re going to really have to tighten liquidity, or something, if they want to have a hope against that.” </blockquote><br /><br /><blockquote>“If they really wanted to stop speculation, they have to raise the rates significantly, say to 20 or 30 percent, for a short period of time,” said Evgeny Gavrilenkov, chief economist at Moscow-based brokerage Troika Dialog. “One day they have to say: Give me my money back, no more repo is available.” “They have to raise interest rates if they want to stop speculation.....But there is still a lot of concern among the authorities that the banking sector might collapse.”</blockquote><br /><br />According <a href="http://www.bloomberg.com/apps/news?pid=20601095&sid=aqpJfhFF6fZ0&refer=east_europe">to Bloomberg</a>, Russia's banks bid for 505 billion rubles in repo auctions on Thursday, more than the 402 billion rubles actually lent. Banks also requested 139 billion rubles in an auction of unsecured loans on 3 February, about six times the 23.5 billion rubles provided. The possibility of obtaining such loans was opened up to over 100 Russian banks in November as part of a plan to boost liquidity amid the seizure in global credit markets. The extra funding has helped lower the average interest rate banks charge each other for overnight loans, known as the MosPrime rate, to 10.83 percent on Wednesday from a record 25.17 percent on Jan. 27.<br /><blockquote>Bank Rossii may send representatives to individual banks to check on their foreign-currency holdings, said Stanislav Ponomarenko, chief economist in Moscow at ING Groep NV. President Dmitry Medvedev told the Federal Security Service, Russia’s spy agency, to monitor the allocation of state funds on Jan. 29, saying it is “doubly criminal” for investors to get rich off the crisis.</blockquote><p><br /><strong>VTB GDP Indicator Shows Severe Contraction</strong><br /></p><p>In any event, while a lot of people in the Russian establishment seem busy trying to decide which side they are batting for in all this, a Russian economy which is basically being starved of liquidity is now spirally downwards and downwards. The most recent piece of evidence for this comes from the latest reading on VTB’s Russian GDP Indicator which showed that economic output contracted at a year on year rate of 4 percent in January, down from December’s 1.1 percent decline, and November's 2.1 percent expansion.<br /><br /></p><p><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjSSvHzOeZjUKCl-_7njoYO5BU428qUhwpZKfqkF7FHlu-kUvotf0Kx-D2m5d60WFb2FI0RNgJK3VrA8YzjZkni0tx9h6_TR1IL-ry7ianKHaDzhLeeVWLzoME9_0i6s8U2btSuEwgCFvMA/s1600-h/russia+gdp2.png"><img id="BLOGGER_PHOTO_ID_5299277342878981762" style="DISPLAY: block; MARGIN: 0px auto 10px; WIDTH: 400px; CURSOR: hand; HEIGHT: 244px; TEXT-ALIGN: center" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjSSvHzOeZjUKCl-_7njoYO5BU428qUhwpZKfqkF7FHlu-kUvotf0Kx-D2m5d60WFb2FI0RNgJK3VrA8YzjZkni0tx9h6_TR1IL-ry7ianKHaDzhLeeVWLzoME9_0i6s8U2btSuEwgCFvMA/s400/russia+gdp2.png" border="0" /></a><br /><br />According to Russian economy Ministry estimates the economy will contract by only 0.2 percent this year after expanding 5.6 percent in 2008, so this estimate now seems hopelessly out of date. If we look at the monthly contraction rate as a reflection of the current quarter on quarter contraction, we find a rate of minus 1.6%, which means that the present rate is something like a 6.5% annualised shrinkage rate. At present this is stationary and not accelerating, but it is quite strong, especially for an economy which only six months ago was expanding at a 6.5% annualised rate.<br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgKf76VrYoqdLo8UyiePyDiUbpxBYtvVxT3H6B1Exfx2WQHsjpVttGpeF2-XmHPYBQdnODZN83Tz4w9tY-7Yq-7-HhhRmsobyPMCE54DqN2r1E1LsR6zIo0_hM_hVggZdVwAnUx_AAH-o7F/s1600-h/russia+GDP.png"><img id="BLOGGER_PHOTO_ID_5299277019154031282" style="DISPLAY: block; MARGIN: 0px auto 10px; WIDTH: 400px; CURSOR: hand; HEIGHT: 245px; TEXT-ALIGN: center" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgKf76VrYoqdLo8UyiePyDiUbpxBYtvVxT3H6B1Exfx2WQHsjpVttGpeF2-XmHPYBQdnODZN83Tz4w9tY-7Yq-7-HhhRmsobyPMCE54DqN2r1E1LsR6zIo0_hM_hVggZdVwAnUx_AAH-o7F/s400/russia+GDP.png" border="0" /></a> </p><br /><br /><p><strong>Services Contract But Less Strongly Than Manufacturing<br /></strong><br />Russia's services industries are still not contracting as fast as the manufacturing sector (34.4), but with the Russian economy shedding 800,000 jobs in December the outlook for improvement is not exactly bright. The PMI reading was little changed - and close to December's all-time low rising to 36.8 in January from 36.4 the previous month. Since a reading over 50 indicates expansion, and below 50 a contraction, this is still a pretty hefty rate of shrinkage. </p><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEilI5ZXDzUY2rbAZ0gQQEcrOYjh40Y0gHB6TP6PwfUkiip4H8WitU9Z-l281P2r5bJfrKX_duAqVajjuFgXJXSVXdx7_n08OtKv5Z48ReyN0BT_ldbPzRyOS54J3budMGxb9qNVD23nRdJY/s1600-h/russia+services+PMI.png"><img id="BLOGGER_PHOTO_ID_5299277592672439042" style="DISPLAY: block; MARGIN: 0px auto 10px; WIDTH: 400px; CURSOR: hand; HEIGHT: 243px; TEXT-ALIGN: center" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEilI5ZXDzUY2rbAZ0gQQEcrOYjh40Y0gHB6TP6PwfUkiip4H8WitU9Z-l281P2r5bJfrKX_duAqVajjuFgXJXSVXdx7_n08OtKv5Z48ReyN0BT_ldbPzRyOS54J3budMGxb9qNVD23nRdJY/s400/russia+services+PMI.png" border="0" /></a><br /><br />Meantime retail sales grew at the slowest annual pace in nine years in December while disposable incomes fell 11.6 percent.<br /><br /><br /><blockquote>“Business activity and incoming new business contracted further to record lows due to still weak demand,” said Svetlana Aslanova, senior corporate analyst at VTB Capital, in the report. “Low levels of workloads have forced companies to cut costs” resulting in jobs cuts, she added.<br /></blockquote><br /><p><br /><strong>New Policies From The Administration?</strong></p><p>With declining reserves in the background, and oil prices which may well not rebound very much this year to concentrate their minds, the Russia adminstration indicated on Wednesday that it was about to make a significant change in the policies it is deploying to fight the financial crisis. The move basically involves switching from bailing out individual companies to attempting to directly support the economy through the banking sector. At the same time Moscow is planning large budget cuts in an attempt to limit the fiscal deficit since letting it run too high threatens to eat up Reserve Fund resources far too quickly if oil prices remain low for any length of time. The general impression is that the administration has now lost hope it can avoid the crisis simply by increasing public spending and is instead digging in deep in an attempt to endure what might turn out to be a rather prolonged recession.<br /><br />The policy change was announced by Igor Shuvalov, Russia's first deputy prime minister, who stressed the government was deliberately choosing to allow gross domestic product growth to fall to zero or below in 2009 to stabilise the economy and maintain foreign exchange reserves. He was thus explicitly rejecting the advice of those economists who had suggested using the reserves to finance a budget deficit of 10 per cent of GDP to promote growth. Of course the risk here is that this will produce a much stronger GDP contraction with unknown social consequences.</p><p>Shuvalov also indicated the government would invest “several percentage points of GDP” in strengthening the banking sector, covering “possible future losses” and supervising a consolidation plan that would see the number of banks cut from 1,100 to 500. Alexei Kudrin, the finance minister, confirmed during a visit to London that the state was preparing to inject $40bn (€31bn, £28bn) capital into banks provided that the money was channelled into the real economy. This would follow last year’s Rbs960bn package of subordinated loans.<br /><br />Shuvalov indicated some key industrial companies would continue to get priority, headed by military enterprises, Gazprom, the gas monopoly, electricity groups and the state railways. This is a far more tightly focused target than the previously announced list of 295 industrial companies deemed worthy of financial support that included oligarch-led groups such as Rusal, the aluminium company, and Norilsk Nickel, the metal combine. Shuvalov suggested that the state should not have lent $4.5bn to Rusal, Oleg Deripaska’s aluminium group, on the security of its 25 per cent stake in Norilsk Nickel, the metals company, when it was clear these shares were worth only $1.5bn. </p><p>In line with the change in policy Vladimir Putin gave the go ahead on Thursday for a second wave of bank bail-outs to extend up to Rbs1,000bn ($28b) in order to refinance the banking sector with new capital and subordinated debt in an effort to transfer the burden for bailing out companies on to commercial banks. Of the three big state-controlled banks, VTB is to receive Rbs200bn in new capital, state-owned VEB is to receive Rbs100bn in capital and Rbs100bn in subordinated debt, and Sberbank, the huge savings bank, may receive funding in the region of Rbs500bn.</p><p>The moves will increase the state’s stakes in these three banks, boosting its role in the Russian economy. The state’s stake in the three banks are Sberbank 61 per cent, VTB 77.5 per cent and 100 per cent VEB. Vladimir Putin said Moscow could also inject up to 100bn roubles in subordinated loans – Tier 2 capital under international banking rules – into private banks but said the government would not seek stakes in return.<br /></p><blockquote>Andrei Sharonov, a former deputy economy minister, who now works as<br />managing director of Troika Dialog, the Moscow investment bank, said the second<br />bail-out of the banking system was part of an effort to switch the government<br />anti-crisis programme to the banking system instead of bailing out individual<br />companies, which must repay some $140bn in foreign debts this year.<br /></blockquote><p></p><blockquote>Danske Bank A/S, which ranks itself among the five biggest traders of the ruble<br />through Finnish subsidiary Sampo Bank Plc, said yesterday the ruble will be<br />allowed to trade freely “within weeks,” because pressure on the currency won’t<br />abate after the decline in oil prices, according to Lars Christensen, Danske’s<br />head of emerging -markets strategy. Urals crude, Russia’s chief export blend,<br />has fallen 70 percent to $43.01 a barrel since reaching a record in July, below<br />the $70 average required to balance the government’s 2009 budget. Energy<br />accounts for more than 70 percent of Russia’s exports.</blockquote>Unknownnoreply@blogger.com8tag:blogger.com,1999:blog-7303901362201842397.post-22273910066854996142009-02-02T10:41:00.005+01:002009-02-02T11:03:04.855+01:00Russian Manufacturing Continues The Rapid Contraction In JanuaryRussian manufacturing contracted at its second-fastest pace since 1998 in January as companies continued cutting production and jobs amid collapsing demand at home and abroad, according to the latest manufacturing PMI report from Markit Economics and VTB Capital. VTB’s Purchasing Managers’ Index rose to 34.4 from December’s record low of 33.8. The length of the manufacturing contraction is now just one month short of the slump that occurred during the 1998 economic collapse. Basically we still need to see the services PMI (out later this week), but this looks to me (on a rough calculation basis) like a 1% quarter on quarter GDP contraction rate, or an annual rate of GDP contraction of 4% in January. <br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjhdgiFVLX3_Ex0hdKxp3rgRHzVCEBQo5ZjvjbGbciFCju5rqaPXO3jlyKNIZoBAB07lmUxm7ackp3F0-2AOTQE0FTDs4CXYrPEleIt9ADMTB6MAAWD_07G2ajHjrmgZRQClVxjavC9bQzA/s1600-h/russia+man+pmi.png"><img id="BLOGGER_PHOTO_ID_5298133451990045266" style="DISPLAY: block; MARGIN: 0px auto 10px; WIDTH: 400px; CURSOR: hand; HEIGHT: 244px; TEXT-ALIGN: center" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjhdgiFVLX3_Ex0hdKxp3rgRHzVCEBQo5ZjvjbGbciFCju5rqaPXO3jlyKNIZoBAB07lmUxm7ackp3F0-2AOTQE0FTDs4CXYrPEleIt9ADMTB6MAAWD_07G2ajHjrmgZRQClVxjavC9bQzA/s400/russia+man+pmi.png" border="0" /></a><br /><div></div><br /><br /><blockquote>“There were numerous reports from panelists that the weaker ruble had partially offset the impact of falling global commodity prices, resulting in a slower overall rate of deflation,” the report said. </blockquote><br /><br /><br />Meanhwhile the ruble weakened again this morning, and fell below the central bank’s target exchange rate of 36 per dollar, only two weeks after Chairman Sergey Ignatiev widened the trading band and committed to using reserves to defend the new level. The ruble depreciated as much as 1.7 percent to 36.3550 per dollar in trading this morning, its weakest level since January 1998.Unknownnoreply@blogger.com12tag:blogger.com,1999:blog-7303901362201842397.post-66050109952653228122009-02-01T08:32:00.003+01:002009-02-01T17:07:11.782+01:00The Ruble Fall Continues As Unemployment SoarsRussia's current woes can be readily summed up in just one single variable - the value of the ruble - and this value, as we all know, is falling. Almost uncontrollably so.<br /><br /><blockquote>The bank’s target will be “very quickly” breached without more intervention, said Gaelle Blanchard of Societe Generale SA in London. “Right now the market is convinced it wants to see the ruble lower,” Blanchard said. “As long as the central bank gives these targets, then speculators are going to have something to aim for.”<br /><br /></blockquote><blockquote>“The market is testing whether the authorities see this band as something permanent or something that will move,” said Lars Rassmussen, an emerging markets analyst at Danske Bank A/S. “Our view is that they’ll move it because it’s not worth wasting the reserves for a band that is obviously not wide enough.”</blockquote><blockquote>First Deputy Prime Minister Igor Shuvalov expressed regret that the general population failed to fully understand the Central Bank’s policy on the ruble’s exchange rate against the dollar/euro basket. The government did let the ruble depreciate, but it did so gradually, providing plenty of time for people to decide which currency to keep their savings in. </blockquote> <br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhY6qYxIJ_UUQ5izl9nwlVtNMcLvY_MP8GAgJId65tVUM9CnK0Na7htjVBUgEq47167zKXNU2sPCFc9SUcbVBYcohCSEd7h0hQh2zT0mw6DQMc4Trhv9HZqu-Dadub0PE9H1cUxfrQRDzo/s1600-h/ruble.png"><img style="display:block; margin:0px auto 10px; text-align:center;cursor:pointer; cursor:hand;width: 400px; height: 236px;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhY6qYxIJ_UUQ5izl9nwlVtNMcLvY_MP8GAgJId65tVUM9CnK0Na7htjVBUgEq47167zKXNU2sPCFc9SUcbVBYcohCSEd7h0hQh2zT0mw6DQMc4Trhv9HZqu-Dadub0PE9H1cUxfrQRDzo/s400/ruble.png" border="0" alt=""id="BLOGGER_PHOTO_ID_5297844653343134610" /></a><br /><br /><br />In fact the ruble fell sharply again last Friday, and was on the brink of breaching the target trading band, yet one more time, following its biggest monthly depreciation in more than a decade. The ruble was down at one point by as much as 1.4 percent on the day (to 35.59 per dollar), 1.1 percent away from breaking the 36 per dollar limit. The Russian central bank has now expanded its trading range 20 times since mid-November in a series of attempts to defend the currency. These continuing attempts to hold a line have lead the central bank to use up more than a third of its foreign-currency reserves since last August, a period in which the ruble has fallen some 34 percent slide against the dollar.<br /><br />The ruble has now depreciated by 20 percent since the start of the year - making January already the worst month for the currency since 1998. And there is obviously more to come, with the government now expecting a decline to 36 per dollar following the latest widening in the trading band, according to First Deputy Prime Minister Igor Shuvalov speaking in the State Duma last week. This "managed devaluation" is seen as an attempt to avoid a reapeat of what happened back in 1998, when the ruble fell by as much as 29 percent in a single day. Yet the currency has now lost over 30% against the dollar (and weakened substantially against the euro) since last summer and all this spells disaster for domestic banks and industrial companies, whose debt is denominated in dollars and euros but who depended on rouble-denominated revenues.<br /><br />One of the principal problems facing those banks and companies who have this mismatch if that they have insufficient foreign exchange liquidity, while other parts of the banking and corporate sector are better positioned. That is the aggregate external position understates the extent of the problem, since the lack of internal confidence makes it hard for those who are under severe stress to find the appropriate lenders. In part as a an attempt at a solution to this problem state owned investment bank Vnesheconombank (VEB) is preparing to issue foreign-currency bonds to be placed among Russian banks with excess of foreign currency and then redistribute the currency raised to those in need of foreign currency liquidity. During the last quarter of 2008 the net increase in foreign currency assets in the corporate sector was over $100 bln. According to the central bank external corporate debt redemptions totaling $120 bln are anticpated during 2009, which indicates a shortfall of only $20 billion, yet according to Interfax the total volume of applications for fx support to VEB from Russian companies is $80 bln. Which suggests that a sizeable chunk of the $100 bln accumulated by Russian corporates at the end of last year was not intended for foreign-currency debt redemptions but was instead a means a protecting free liquidity from falling in value. That is they converted their liquidity into USD and Euro to avoid losses (or make gains) from the devaluation.<br /><br /><br /><strong>Inflation Always Carries A Price</strong><br /><br />The root of Russia's most recent problems is very evidently all that excess inflation which Russia has seen over the last 18 months (if it hadn't been for the inflation there would have been no devaluation, and hence no issue with forex loans), inflation which has taken badly needed competitiveness from Russia's manufacturing industry at a time when the oil and commodity sectors are in the grips of a severe price slump (which means their contribution to the economy is greatly reduced).<br /><br />Obviously Russia's situation doesn't make for any easy answers, and even devaluation brings with it the problem of the attendant inflationary uptick from imported goods. Russia's month on month inflation is expected to reach 2.4 percent in January 2009, according to the latest estimates from the Russian Federal State Statistics Service (Rosstat), and the Economy Ministry currently estimates Russia's whole year inflation could be as high as 13 percent in 2009. In fact the annual rate for last December was 13.3% (see chart below), so they seem to anticipate very little change in the situation. In fact they may be unduly pessimistic here, since they are almost certainly underestimating the force of Russia's current economic contraction, and the collapse in internal demand may well bring Russia's inflation down more rapidly than they are expecting.<br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhMfbrJns6sauvIWvGL4mowJlwiN6iRI-7LGFpASZYO_QeqPf8PaOX5TzX9vb0tbNgrfdBE9y14VVWw40QULhefXM60SiR61fC4sqILGtXN5Q53AcQi1K5-0cIpYpelKxA2N6YDtZ8BjPZS/s1600-h/russia+CPI.png"><img id="BLOGGER_PHOTO_ID_5297742512866630354" style="DISPLAY: block; MARGIN: 0px auto 10px; WIDTH: 400px; CURSOR: hand; HEIGHT: 237px; TEXT-ALIGN: center" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhMfbrJns6sauvIWvGL4mowJlwiN6iRI-7LGFpASZYO_QeqPf8PaOX5TzX9vb0tbNgrfdBE9y14VVWw40QULhefXM60SiR61fC4sqILGtXN5Q53AcQi1K5-0cIpYpelKxA2N6YDtZ8BjPZS/s400/russia+CPI.png" border="0" /></a><br /><br /><br /><strong>Monetary Tightening In The Face Of An Economic Slump</strong><br /><br />Basically the Russian economy is currently suffering the effects of a long term policy of trying to control the currency value at the same time as being "soft" on inflation. This approach evidently hasn't worked out, and it is to be hoped that some lessons for the future may have been learned, but the sorry reality is that those currently responsible for managing Russia's economy are left with only hard policy options at this point, if they wish to avoid another default. Basically, and on top of all the rest, the economy has two added problems (apart, that is, from the drop in oil prices, the internal credit crunch and the slump in domestic demand): the high inflation, and the capital exit.<br /><br /><br />Russia's reserves are disappearing for a whole variety of reasons at this point. First there are foreign investors who are simply pulling out - investors have removed about $290 billion from Russia sincethe start of August, according to the latest estimates from BNP Paribas. Secondly the Russia central bank has been using reserves to defend the currency. According to the Central Bank last week, Russia's foreign exchange and gold reserves dropped by nearly $10 billion from $396.2bn to $386.5bn in the week to 23 January.Citigroup calculate that the bulk of that fall was the by-product of a strong negative revaluation effect - which may have exceeded $8 billion - and the strengthening of USD vs EUR and GBP probably subtracted $5.5bn and $3.7bn, respectively, from the total in USD. Nonetheless Russia has spent very large quantities of foreign exchange on supporting the ruble since August . According to Kommerant reports Bank Rossii told Russian bankers in a meeting in the middle of the month that their “managed devaluation” of the ruble was over, but as we can see, this is far from being the case. Nikolai Kashcheev, head of economic research at Moscow-based MDM bank, Russia may abandon the ruble's dollar-euro trading band completely and allow the currency to trade freely, with the central bank only intervening to avert serious economic shocks using a so-called “dirty float” mechanism.<br /><blockquote>“A dirty float would look like it was a free market but the central bank would still have a measure of control,” said Kashcheev, who forecast the ruble may fall 5.9 percent against the dollar if the central bank made the switch this week. “It would be a preferable outcome to the devaluation because what they’re doing at the moment is costing too much in reserves.” </blockquote><br /><br />The central bank sold $3.2 billion last Friday alone, and $800 million Thursday, according to MDM Bank estimates. The bank appears to have stayed out of the market between January 23 and 27, the first three days after widening its exchange-rate band.<br /><br />Other demands on foreign exchange comes from Russian corporates who need to pay off foreign exchange debt, or simply protect their ruble liquidity from the devaluation fall, and from individuals and households who wish to do the same.<br /><br />As a result of the reserve and inflation pressures Russia’s central bank has little alternative but to maintain a relatively tight monetary stance, and indeed the bank raised two key interest rates for the third time since the start of November last week, with the repo rate for one-day and seven-day loans being raised to 11 from 10 percent. Now I say "relatively tight", since obviously with CPI inflation currently running at over 13%, even 11% interest rates are negative in Russia (by around 2%), and thus Russian policy rates could be considered somewhat accommodative (though not as accommodative as would be desireable given the strength of the hit the economy just took). At the end of the day terms like "tight" and "accomodative" are relative terms, and it all depends what you are dealing with.<br /><blockquote>The Central Bank does not rule out the possibility of a new wave of the crisis erupting in the banking sector, the bank's Chairman Sergei Ignatyev told the Russian State Duma on Friday. He noted that although such a risk was unlikely in the near term, it was still fairly possible in the foreseeable future. The new wave of crisis may be brought about by a rise in loan defaults, Ignatyev explained. The Central Bank is holding meetings with bankers and keeping a watchful eye on the situation, the official said, adding that the bank was ready for any new developments. He also noted that an increase in certain banks' capitalization might prove necessary.</blockquote><p>Russian media are also reporting that the government anti-crisis committee (which is headed by Deputy Prime Minister Shuvalov) is putting together a rescue plan for carmaker OAO GAZ. If confirmed the move that would mark the first custom built financial rescue of an individual company by the government during the current economic crisis. OAO GAZ, which is based in Nizhny Novgorod, may need $1.6 billion in state funds to continue operating. Shuvalov has confirmed that the government plans to offer substantial support to Russian companies. “The list of such companies will be expanded to 2,000,” he said, noting that it would include both companies involved in the technical modernization of the national economy and those in a difficult financial situation. “To save all companies is impossible and unnecessary".</p><p>Another company in difficulties is United Co. Rusal, who are set to sell shares in a private placement as they seek to refinance about $16.3 billion of debt, according to billionaire shareholder and company Chairman Viktor Vekselberg speaking in Davos. The Russian company owes $7 billion to foreign banks, about $6.5 billion to domestic lenders and about $2.8 billion to Mikhail Prokhorov’s Onexim Group. Rusal is in “active” talks with creditors. Rusal, which is Russia’s largest aluminum company, will cut output by as much as 10 percent and freeze investment for about three years. Aluminium fell to a five- year low this month, and profit is projected to slump 88 percent to $476 million this year, according to an estimate by ING Groep NV. Aluminum needs to trade at $1,700 a metric ton for Rusal to be able to service its debt and pursue new projects, according to Vekselberg - aluminum for delivery three months forward was 1.2 percent lower at $1,350 a ton as of 12:18 p.m. on Friday on the London Metal Exchange. Rusal was forced to seek a $4.5 billion bailout from state-owned Vnesheconombank in October to refinance loans used to buy 25 percent of OAO Norilsk Nickel, Russia’s biggest metals and mining company.<br /><br />So far Russia’s indebted companies have been bailed out by the government, but this year they are due to repay an additional US$117bn to foreign creditors. With opportunities to roll over existing debt limited, and the government’s reserves down by US$200bn since August, the chances of continuing rescues by the federal authorities appear greatly reduced. According to the latest central bank data, some US$117bn of debt needs to be repaid this year, with US$52bn owed by banks and US$62bn by corporations. Debt restructuring looms on the horizon.<br /><br /><strong>Unemployment Surges</strong></p><p>Evidently the crunch in the financial economy - Russia's base money shrank dramatically (from 4283 bln rub to 3896 bln rub, that's not far short of 10% in a month) between 29 December and 26 January - is having a serious impact on the real economy, and nowhere is that clearer than in the unemployment numbers. As could have been expected Russia’s unemployment rate rose sharply in December (up to 7.7 percent from 6.6 percent in November), its highest level since November 2005, as industrial production shrank the most in ten years. The total number of unemployed reached 5.8 million people, as compared with 5 million in November.<br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhkmr1I2jntJAKR_c_-uSPFUvx1G92gJ_XOILxUmTBclg1mrUyJ07TBQuVzsvaebTKBOUThuY9ZetH2AWuD21Ahd7OlXLI9KSLfsFvWpfl67ZHRB5BsJ7ngTFYr7H_P6F1XhPiQWwXeVXVc/s1600-h/russia+unemploy.png"><img id="BLOGGER_PHOTO_ID_5297789227262125490" style="DISPLAY: block; MARGIN: 0px auto 10px; WIDTH: 400px; CURSOR: hand; HEIGHT: 202px; TEXT-ALIGN: center" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhkmr1I2jntJAKR_c_-uSPFUvx1G92gJ_XOILxUmTBclg1mrUyJ07TBQuVzsvaebTKBOUThuY9ZetH2AWuD21Ahd7OlXLI9KSLfsFvWpfl67ZHRB5BsJ7ngTFYr7H_P6F1XhPiQWwXeVXVc/s400/russia+unemploy.png" border="0" /></a><br /><br />What is most notable is the sharpness of this rise. Alongside the rise in umployment wages have started to fall, and the average monthly wage fell an annual 4.6 percent in December to 17,112 rubles ($517.85), the first contraction since October 1999 when they fell 2.2 percent. Real disposable income fell 11.6 percent, the biggest contraction since August 1999, according to Rostat. So this is how one part of the mechanism works basically. The oil price drops, the ruble devalues, fx loans become unsustainable, new funding dries up, and then the real economy sinks like a stone, and as the unemployment goes up, household and investment demand go down, and economic activity heads on a downward spiral.<br /><br /><strong>GDP Growth Outlook</strong></p><blockquote><br /><br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhDS45xHp1p_x52nfy7K1awvdBOsLbiFtk_AgFAraPrjUTI3NaabPKunSBCnV4r1oTnuJk3DhpADTR_lU6DZKLRlNciHe6lV_m4LZMkAQS_7aeuBDsvIgxZvMmpj0-im-Kxex1Lkplisic2/s1600-h/russia+GDP.png"><img id="BLOGGER_PHOTO_ID_5297795968049655602" style="DISPLAY: block; MARGIN: 0px auto 10px; WIDTH: 400px; CURSOR: hand; HEIGHT: 206px; TEXT-ALIGN: center" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhDS45xHp1p_x52nfy7K1awvdBOsLbiFtk_AgFAraPrjUTI3NaabPKunSBCnV4r1oTnuJk3DhpADTR_lU6DZKLRlNciHe6lV_m4LZMkAQS_7aeuBDsvIgxZvMmpj0-im-Kxex1Lkplisic2/s400/russia+GDP.png" border="0" /></a><br /><br />First Deputy Prime Minister Igor Shuvalov told the State Duma today. “The crisis will continue for three years, of which 2009 will be the most difficult,” </blockquote><p>If we now turn to economic forecasts for 2009, Economy Minister Alexei Kudrin said last week that Russia's 2009 GDP growth would be close to zero - a figure which was revised down from the Economy Ministry's earlier 2 percent estimate. <blockquote>“We must be prepared for further economic decline and a conservative tax and budget policy. Yet we will implement our main programs involving the social protection of the population. The reserves we have built up allow us to be up to that task,” Kudrin stressed. </blockquote><p>Current government estimates also project capital flight to be between $100 billion and $110 billion in 2009, while budget revenue will be far below the planned RUB 10.9 billion (approx. $307.9bn). Kudrin's present estimate is RUB 6.5 trillion (approx. $183.6bn), with oil exports expected to generate the bulk of the revenue. He says the federal budget is expected to decline by 40 percent, from a projected $300 billion [10.9 trillion rubles] to about $185 billion [6.5 billion rubles]. Russia’s current budget is based on an average oil price of $70 a barrel, even though Urals crude, the country’s chief export blend, has slumped 69 percent from a July record to $43.72 a barrel. As a result Prime Minister Vladimir Putin has told the Finance Ministry to recalculate the budget, with the Economy Ministry now forecasting oil to trade at an average $41</p><blockquote>.“These are the real challenges we face for our economy and the budget system,” Shuvalov said. “If we don’t change our budget targets, and simply replace this lost revenue with money from the reserve funds, the budget deficit will be 6.1 percent of GDP.”</blockquote><p>Kudrin is suggesting that Russia will probably spend the bulk of its 7.317 trillion ruble oil-fund reserves to protect the budget, some, “but not all,”. The economic crisis is likely to “peak” this year, and tax revenue may slide by 1 trillion rubles, he added. But Elina Ribakova, Chief Economist at Citibank Russia takes a different view:</p> <blockquote>“They're planning a large fiscal deficit. Kudrin was mentioning six per cent and our estimate is we could reach ten per cent of GDP, which is most of the reserve fund. So under that scenario yes, we could easily run out of money this year. But I hope that by prudent macroeconomic preemptive policies, we'll not allow that to happen.” </blockquote><p>Russia's Reserve Fund now stands at 4.7 trillion rubles ($142.5 billion) and the National Wealth Fund at 2.6 trillion rubles ($79 billion). On February 1 2008 the Finance Ministry divided the former Stabilization Fund into the Reserve Fund, which is intended to cushion the federal budget from a plunge in oil prices, and the National Wealth Fund, designed to help Russia carry out pension reforms. </p><blockquote>First Deputy Prime Minister Igor Shuvalov stated that the global financial crisis is expected to last three years, He confirmed the appropriateness of the government’s reserve strategy, noting that the Finance Ministry was under pressure to start using the reserves several months ago. The crisis could be even more severe than was originally thought, he warned. “We are considering a scenario which is already tough enough, but it could get even tougher, with federal and regional budget revenues falling more sharply than we are estimating,” Shuvalov explained.</blockquote><p>Unless the oil price recovers soon, Russia's current-account surplus will turn into deficit during 2009 (the Economist Intelligence Unit forecasts that it will equal 4% of GDP), meaning that the country would be forced to subsidise vital imports, including food, out of its already strained dollar holdings. Even if an outright default is likely to be avoided, some debt restructuring moves involving the bulk of Russian debt now seem more or less unavoidable. </p><p><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjufqu6yxyYu1lQd2JjRSZ5YmsVx-dmSZODXzMJ8RGULrStco6n1bITihxR9GiIZuogO4_VrH1ow9G8N6LNa6hyphenhyphenpCEnv812Fxi6FXot91ZQpq9FDO37ezTkgFIzwzWYHix-UgA0y7TePd62/s1600-h/russia+CA+surplus.png"><img id="BLOGGER_PHOTO_ID_5297796087118053298" style="DISPLAY: block; MARGIN: 0px auto 10px; WIDTH: 400px; CURSOR: hand; HEIGHT: 203px; TEXT-ALIGN: center" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjufqu6yxyYu1lQd2JjRSZ5YmsVx-dmSZODXzMJ8RGULrStco6n1bITihxR9GiIZuogO4_VrH1ow9G8N6LNa6hyphenhyphenpCEnv812Fxi6FXot91ZQpq9FDO37ezTkgFIzwzWYHix-UgA0y7TePd62/s400/russia+CA+surplus.png" border="0" /></a> As for the outlook for Russian GDP, Kudrin's forecast seems somewhat on the optimistic side, and it is interesting to note that Citgroup have now revised to a 3% contraction in 2009 followed by growth of 1.7% in 2010. They argue (and I agree) that the key change in 2009 GDP is likely to come on the domestic consumption side. Private consumption, which accounts for about 80% of total consumption, now looks set to contract significantly (Citigroup forecast 4.6%), even if the government keeps its originally planned level of current spending. </p><p>At the same time investment will also contract (Citigroup suggest by 10%) owing to reduced access to credit and further possible cuts in government capital spending (which accounts for about 10% of total investment growth). The government capital injections (an additional US$40 billion, according to Finance Minister Kudrin, Bloomberg, 22 January) is more liekly to go towards covering bank non performing loan losses rather than supporting new credit. </p><p>Even more worryingly Citigroup forecast a 10% contraction in new credit. Furthermore, they argue that the government may well have to cut capital spending owing to the need to accommodate increases in social spending and support for the regional governments. As a result of falling income and investment spending imports will fall (perhaps by 20% in dollar terms), this will be positive for the current account deficit (and to some extent for GDP. A 3% CA defeicit thus seems reasonable assuming no rebound in oil prices.</p><p>So, not a rosy picture. Next stop some more real economy data next week, and the manufacturing and services PMIs.</p>Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-7303901362201842397.post-28338173375107587522009-01-31T09:45:00.000+01:002009-01-31T09:46:16.649+01:00Russia's Reserves No Longer Cover Foreign DebtThe <a href="http://www.eiu.com/index.asp?layout=VWArticleVW3&article_id=1434203528&refm=vwHome&page_title=Latest%20analysis&rf=0">Economist Intelligence Unit warns</a>:<br /><br /><blockquote>State handouts cannot continue indefinitely, not least because reserves no longer cover total foreign liabilities: on the basis total debt was US$540bn at the end of September 2008, and that US$73bn was repaid in the fourth quarter, total debt is now US$467bn and private-sector debt US$425bn. Russia entered the crisis with the world’s third largest cache of central bank reserves, but it has been dwindling at an accelerating pace. By mid-January, reserves had declined to just below US$400bn, meaning that more than a third of the total was spent over the past five months.</blockquote><br /><br />Longer post coming over the weekend.Unknownnoreply@blogger.com3tag:blogger.com,1999:blog-7303901362201842397.post-54759740276489669682009-01-22T22:52:00.007+01:002009-01-23T15:06:51.522+01:00Russia's Industrial Output Slumps As Reserves Leave At A Record RateRussian industrial production dropped sharply again in December - by the most since at least 2003. Output was down 10.3 percent following an 8.7 percent fall in November, according to data from the Federal Statistics Service announced yesterday (Thursday) by central Bank Chairman Sergey Ignatiev. Output growth for the year was 2.1 percent, the slowest since at least 1999. <br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjD2kOAf2ChbpIxR2il6WkdumcTM-z0WuhZ5Vxz8ijbAShtY1Cn3b0D7gMeIDHj4biN7X01UqMHJQN_2rfOyLJM2vkg1znd2DdXxIhHEIqW_rgYpEABkoPd1rbXDChyphenhyphenVGo1RWbbDwWDkekN/s1600-h/russia+manufacturing.png"><img style="display:block; margin:0px auto 10px; text-align:center;cursor:pointer; cursor:hand;width: 400px; height: 237px;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjD2kOAf2ChbpIxR2il6WkdumcTM-z0WuhZ5Vxz8ijbAShtY1Cn3b0D7gMeIDHj4biN7X01UqMHJQN_2rfOyLJM2vkg1znd2DdXxIhHEIqW_rgYpEABkoPd1rbXDChyphenhyphenVGo1RWbbDwWDkekN/s400/russia+manufacturing.png" border="0" alt=""id="BLOGGER_PHOTO_ID_5294482334970516610" /></a><br /><br />Manufacturing fell an annual 13.2 percent in December, compared with a decline of 10.3 percent in November, as steel-pipe production dropped an annual 35.3 percent and coking coal output plunged 44.2 percent. Truck production plummeted 67.1 percent. <br /><br />This data is not surprising, and only confirms what we have been seeing in the VTB PMI. The next interesting data appointment will be on 2 February, when we should get to see what happened in January.<br /><br /><br /><strong>Reserves Drop Sharply</strong><br /><br />Russia’s international reserves fell $30.3 billion last week, the second-biggest drop on record, as the central bank accelerated the rate of the ruble devaluation and sold increasing quantities of foreign currency in an attempt to manage the pace of the decline. Russia’s reserves have now fallen 34 percent from the record high of $598.1 billion in August while the ruble has fallen 29 percent against the dollar over the same period. <br /><br />Some of last weeks decline can be attributed to the dollar’s 1.5 percent gain against the euro in the week ended January 16, since this means a fall in the dollar value of the other currencies in the reserves. Evgeny Nadorshin, senior economist at Moscow’s Trust Investment Bank, estimates that about $18.3 billion of the drop can be accounted for by central bank interventions last week. <br /><br />(The reserves are made up of 44 percent euros, 45 percent dollars, 10 percent pounds sterling and 1 percent yen). <br /><br />The Ruble continued to fall today (Friday) after the central bank announced last night that it was “finished” with its gradual devaluation of the ruble and was going to let “market factors” help determine the level of the currency. The bank set the weakest end of the currency’s trading range against a target basket of dollars and euros at 41 as of today, or 36 per dollar, at a USD of around 1.3 to the euro. Bank Rossii has now widened the currency trading band 20 times since mid-November as it seeks to rebalance Russia's economy amid plunging oil prices and the global financial crisis. <br /><br />Following yesterdays announcement the ruble fell again this morning, dropping 1.5 percent (to 33.1073 per dollar), extending this weeks decline to 1.8 percent.<br /><br /><blockquote>“This is an open invitation for speculators to test how quickly the ruble can get to 41,” said Ulrich Leuchtmann, head of currency research in Frankfurt at Commerzbank AG, which ranks itself among the biggest 10 traders of the ruble worldwide. “They wanted to decrease speculative pressures, but now they’ve given the market a good reason to increase them.” </blockquote>Unknownnoreply@blogger.com5tag:blogger.com,1999:blog-7303901362201842397.post-29712158795577350782009-01-18T14:33:00.010+01:002009-01-19T18:16:26.370+01:00VTB Bank Russia GDP Indicator Shows 1% Contraction In DecemberAs the ruble falls below the weakest level seen during the 1998 Russian crisis it may well be a timely moment to ask ourselves just what is happening to the real economy in Russia. To help us do this we have the latest survey data from VTB Bank Europe, which points to an overall contraction in Russian GDP in December. For an economy that was only months ago growing at a 7% annual rate this sharp contraction is astonishing. The VTB GDP Indicator is derived from the bank's Europe’s PMI surveys of business conditions in the manufacturing and service sectors of Russia. By weighting together the output measures from these surveys, an indicator of total output is produced. Regression analysis is then applied to derive an estimate of GDP growth. The bank itself describes the indicator as follows:<br /><br /><blockquote>The Russian GDP Indicator has been developed for VTB Bank Europe by Markit Economics to provide a tool to help policymakers and investors monitor economic conditions in Russia. Key features of the Russian GDP Indicator are:<br /><br />It is available several weeks ahead of official first estimates of GDP (for example, Goskomstat did not release their first estimate of 2005 third quarter growth until December 2005);<br /><br />It is produced monthly, rather than quarterly, allowing quicker identification of changing business conditions and turning points in the economic cycle;<br /><br />It is internationally comparable with other GDP Indicators that Markit Economics has launched, including the Eurozone GDP Indicator;<br /><br />On average, Markit Economics’s GDP Indicators have been more accurate at estimating GDP growth rates than official first estimates (the latter tending to be revised significantly after initial publication)<br />VTB Bank</blockquote><br /><br />In December, the Russian GDP Indicator fell below zero for the first time since March 1999, to -1.1%, from 2.1% in November. Over Q4 as a whole, the GDP Indicator has signalled a year on year expansion of 2.0%.<br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhxFBCiKaQPiSc5VhuC_1pGEETQIQkhxZwQ5mxqvmJY1-K389myRBZFpF9JtfzwNnrBkhnvg_cEFhqxoRThH_Qcc5R3qLw6f50IYTKfOaao3VEKDPG3SA5Z1wcGYEX-5itpO61fh0MMyrUf/s1600-h/russia+GDP+one.png"><img id="BLOGGER_PHOTO_ID_5292626668793424194" style="DISPLAY: block; MARGIN: 0px auto 10px; WIDTH: 400px; CURSOR: hand; HEIGHT: 244px; TEXT-ALIGN: center" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhxFBCiKaQPiSc5VhuC_1pGEETQIQkhxZwQ5mxqvmJY1-K389myRBZFpF9JtfzwNnrBkhnvg_cEFhqxoRThH_Qcc5R3qLw6f50IYTKfOaao3VEKDPG3SA5Z1wcGYEX-5itpO61fh0MMyrUf/s400/russia+GDP+one.png" border="0" /></a><br /><br /><br />But this is perfectly consistent with a quarter on quarter contraction, as we can see in the monthly diffusion index GDP chart. So there is no doubt about it as far as I am concerned, the Russia economy contracted in Q4 2008, and really, effectively, the Russian recession has now started.<br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjd3GpqmSUBFCjcVtx1tJQqXNok9BNnhG1xP1dCbXPlSCMm7yWMoD-6hnIZpxS_RsBgED28oxq8agNi6rTpgh_odTEqm2IrO3DlYvY4cAgMkBk3DQFV1EJMfD8_BKkGeqyQ50qLPdSpVQ_q/s1600-h/russia+GDP+one.png"><img id="BLOGGER_PHOTO_ID_5292634240334543026" style="DISPLAY: block; MARGIN: 0px auto 10px; WIDTH: 400px; CURSOR: hand; HEIGHT: 246px; TEXT-ALIGN: center" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjd3GpqmSUBFCjcVtx1tJQqXNok9BNnhG1xP1dCbXPlSCMm7yWMoD-6hnIZpxS_RsBgED28oxq8agNi6rTpgh_odTEqm2IrO3DlYvY4cAgMkBk3DQFV1EJMfD8_BKkGeqyQ50qLPdSpVQ_q/s400/russia+GDP+one.png" border="0" /></a><br /><br /><br />Further evidence for the slowdown can be found in the fact that unemployment rose 400,000 in November and while retail sales grew at the slowest annual rate in five years. Also in November, real disposable income fell on an annual basis while capital investment growth continued to drop back. The rouble ended 2008 20% lower versus the US dollar and 15% weaker against the euro, while the budget for 2009 remains under threat from falling oil prices.<br /><br />The most recent official GDP figures from the Federal Statistics Service indicated year on year GDP growth of 6.2% in the third quarter of 6.2%, a figure which was itself a three-year low. This result was rather weaker than the advance trend registered by the GDP Indicator, which averaged 6.8% over the same period. The stronger VTB GDP Indicator may well reflect the absence of construction coverage in the PMI surveys – annual growth of construction value added in Q3 almost halved compared to the previous quarter – and probably also did not fully capture the effect of plummeting oil prices and weakening investment growth, on the other hand it the number is not a bad first estimate at all, and I emphasise, we get it at the end of the month in question.<br /><br />In fact over the past nine years the official statistics office series and the VTB GDP Indicator have had a pretty close relationship, and the correlation is currently 0.88 (see chart below). Moreover, the Indicator has successfully captured the major peaks and troughs in growth throughout the period, thus I think we need to take the latest PMI based data very seriously indeed.<br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjywrfQ_yOJDcaMbw1Kjc684Y3CRNr3dKWVxHfNugWe4hF80MFTu1_eE6eEX7HqAzDv2PxDu_e_ub18E3kQRCH_5g31Ty0YDHdiBn8ZN_jIVloNsrHUNz70XnRLmMHppb87Bhxx0xZe6_rC/s1600-h/russia+next+chart.png"><img id="BLOGGER_PHOTO_ID_5292633047971001346" style="DISPLAY: block; MARGIN: 0px auto 10px; WIDTH: 400px; CURSOR: hand; HEIGHT: 254px; TEXT-ALIGN: center" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjywrfQ_yOJDcaMbw1Kjc684Y3CRNr3dKWVxHfNugWe4hF80MFTu1_eE6eEX7HqAzDv2PxDu_e_ub18E3kQRCH_5g31Ty0YDHdiBn8ZN_jIVloNsrHUNz70XnRLmMHppb87Bhxx0xZe6_rC/s400/russia+next+chart.png" border="0" /></a><br /><p>The ruble depreciated today to 33.1710 per dollar, its lowest level since early 1998. The ruble has lost 7.7 percent since official trading resumed this year, extending the decline to 29 percent since August, 2008. Investors have now withdrawn $245 billion from Russia since August according to data from PNB Paribas. Russia’s reserves, which are the world’s third-largest, fell by $171.6 billion to $426.5 billion between August and Jan. 9.</p><p>Bank Rossii, which manages the ruble against a basket of about 55 percent dollars and the rest euros, widened its target range again today. The currency has fallen 29 percent versus the basket since Aug. 1 and is now able to decline about 22 percent from a target rate, from about 3.6 percent on Nov. 11, the start of the current round of depreciation. The ruble weakened 1.4 percent to 37.8224 against the dollar-euro basket by 5 p.m. today in Moscow, extending this year’s drop to 6.7 percent. It depreciated to 43.8880 per euro, the lowest since the common currency’s introduction in 1999, and has lost 5.7 percent this year. </p><p>The ruble weakened 5.3 percent against the dollar and 9.8 percent versus the euro last week, the most since 1999. That compares with a record 71 percent slide in the week to Aug. 28, 1998, and a 42 percent slump the week after. Russia’s Mosprime rate, the average interest- rate banks charge to lend money to each other, rose to a two- month high of 12.5 percent today, according to the central bank. </p><blockquote>Russia’s economy will probably grow more slowly this year than earlier forecast as the price of oil, the country’s chief export earner tumbles, according to Merrill Lynch & Co. Gross domestic product will probably expand 0.9 percent, rather than the previous projection of 3.7 percent, Merril’s Moscow-based economists Yulia Tsepliaeva and Ivan Bokhmat wrote in a report sent to clients. </blockquote><br /><br /><blockquote>“Russia has been unable to avoid the strongly negative impact of the global crisis and downward correction of commodity prices,” Tsepliaeva and Bokhmat said. “The inefficiency of the government plan and limited channels to deliver government support and liquidity to mid-sized companies make a hard landing scenario more and more likely for Russia.” </blockquote>Unknownnoreply@blogger.com5tag:blogger.com,1999:blog-7303901362201842397.post-30698235922539704512008-12-19T09:16:00.017+01:002008-12-19T23:37:43.246+01:00Russia's Macro Data Starts To Confirm The Severity Of The Downturn<strong>The Ruble Devaluation Continues</strong><br /><br />The ruble fell the most in nine years against the euro this week after the central bank widened its trading band twice and allowed the currency to fall by a further 3.8 percent, following last week's 1 percent devaluation. The currency retreated to a maximum of 5.8 percent over the week, although it recovered somewhat and was up 0.1 percent again today (Friday) over yesterday, trading at 39.1772 per euro at midday in Moscow. The currency has now fallen 16 percent against the dollar since the start of August, and added another 1.3 percent to its losses today, hitting 27.8412 per dollar and falling 1.1 percent (to 33.1020) against the currency basket which is targeted. The ruble thus lost 3.9 percent to the basket this week, in the process experiencing its sixth weekly drop.<br /><br /><br /><strong>Foreign Exchange Reserves Continue To Decline</strong><br /><br /><br />Russia’s currency reserves fell $1.6 billion to $435.4 billion during the week to 12 December. When compared with the drop of $17.9 billion the week before you could reach the conclusion that the rate of outflow was steadying up, but this does not seem to be the case, since the size of the drop is largely a by-product of the valuation effect produced by the change in the USD-Euro cross, since we need to remember that euro, which constitutes around 44 percent of the reserves, was up 5.1 percent against the dollar during the week. The pound also gained 1.8 percent against the dollar. Hence the dollar value of the euro and pound sterling holdings (about another ten percent of the basket) were up. Vladimir Osakovsky, an economist in Moscow at UniCredit has done some calculations, and he estimates that Russia's central bank probably sold about $12.5 billion in foreign currency last week. Chris Weafer, chief strategist at Moscow bank UralSib, comes up with a similar estimate, and suggests the bank probably sold about $11.5 billion to counter the ruble’s slide, given that the euro component of the reserves increased in value by about $10 billion. (Actually, anyone interested in the somewhat ironic dimension of having so much analysis of Russia's crisis from economists at Unicredit Moscow, while back in Italy the bank's shares are currently falling mightily on a Merrill Lynch downgrade due to their Eastern Europe exposure, <a href="http://italyeconomicinfo.blogspot.com/2008/12/unicredit-shares-fall-again-merrill.html">may be interested to read this post of mine</a>).<br /><br /><strong>Producer Prices Fall Sharply<br /></strong><br />So the ruble is falling and the reserves are flowing out at a rather fast rate, but this is not producing inflation in Russia - in fact quite the contrary, disinflation is very strong in Russia right now, and indeed if things continue at this rate (especially given the sharp contraction in internal demand) <strong>deflation</strong> and not inflation is going to be the big headache. Some evidence to indicate this danger can be found in the fact that Russian producer prices - which are widely regarded as an early indicator of forthcoming inflation - fell sharply again in November, pushing the annual rate to its slowest pace since March 2007 as demand for material for industrial production weakened rapidly. The cost of goods leaving Russian factories and mines fell 8.4 percent between October and November, while the year on year rate of increase dropped to 4.2 percent, according to data out today (Friday) from Rostat. This compares with 17.4 percent y-o-y rate in October, the Federal Statistics Service in Moscow said today.<br /><br /><p><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjdtfMaAgKjc2HyhvpETBkluEq0_y696Ef8Bu_i36xFpBVoO_Cmb20pgrlTt7Hxf1llKbgAHFfX85tHQOchT3i1Iar6svau8y7VgDA7LdM0uyzp-USY4-3uvOiAuFyOE0Qd2OMlBMm9X4Oy/s1600-h/russia+ppi.png"><img id="BLOGGER_PHOTO_ID_5281488318975812802" style="DISPLAY: block; MARGIN: 0px auto 10px; WIDTH: 320px; CURSOR: hand; HEIGHT: 191px; TEXT-ALIGN: center" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjdtfMaAgKjc2HyhvpETBkluEq0_y696Ef8Bu_i36xFpBVoO_Cmb20pgrlTt7Hxf1llKbgAHFfX85tHQOchT3i1Iar6svau8y7VgDA7LdM0uyzp-USY4-3uvOiAuFyOE0Qd2OMlBMm9X4Oy/s320/russia+ppi.png" border="0" /></a><br /><br />The November fall follows a 6.6 percent monthly drop in October, and it is clear that the rate of disinflation in producer prices is extraordinarily rapid, and it may be that we will soon enter outright price deflation. The biggest difficulty is the almost complete lack of control by anyone in authority and the with tecnical expertise to adequately handle macro economic management, whether on the upside or the downside. This is quite simply all terribly dramatic. </p>Consumer price inflation is also slowing, and was down to 13.8% in November, from 14.2% in October. Russia's consumer price inflation rate was running at 0.1 percent in the week between December 9 and 15, according to the Federal State Statistics Service. Inflation was thus 0.3 percent for the month to date and 12.9 percent for the year to date, compared to 0.7 percent and 11.4 percent in the same periods in 2007. So disinflation is already well at work even in consumer prices. Still, these are very - unacceptably - high numbers, and those who so willingly acquiesced in them earlier will now feel the downside of their negligence, although unfortunately it is - as ever - the poor old Russian in the street who will really pick up the bill.<br /><br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhvh8GiZQO_UjWiohBvGGmrlhyphenhyphenCUNyr3rgOyG7XhdWEu8ocqHv0ce-ktgDKdYQt14_G01LG44NjNkaMpl-TPSZHiUNofTA943ejpEGzqjSb4_U8hKJOmqBy0F8SNpsHl_cct2eejyQVmBS2/s1600-h/russia+cpi.png"><img id="BLOGGER_PHOTO_ID_5280041992209494466" style="DISPLAY: block; MARGIN: 0px auto 10px; WIDTH: 320px; CURSOR: hand; HEIGHT: 194px; TEXT-ALIGN: center" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhvh8GiZQO_UjWiohBvGGmrlhyphenhyphenCUNyr3rgOyG7XhdWEu8ocqHv0ce-ktgDKdYQt14_G01LG44NjNkaMpl-TPSZHiUNofTA943ejpEGzqjSb4_U8hKJOmqBy0F8SNpsHl_cct2eejyQVmBS2/s320/russia+cpi.png" border="0" /></a><br /><br /><br /><br /><p><strong>Rapid Economic Slowdown<br /></strong></p><br /><br /><br /><p>More evidence for the rapid velocity of the economic slowdown is provided by the index of key economic activities, which has fallen back from a year on year high of 10.7% in April to a 2008 low of 2.6% year on year in October. This would seem to indicate that the economy may well have been contracting month on month between September and October, although as with much of the data which follows we do not have a lot of systematic access to direct month on month comparisons to be able to closely scrutinise what is happening.<br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjT5xFmC-IHF5EwxurWXSotkmSZGkpL3Nh9u0YHICiwAHPZPOGSVd9xAPxxxNxrL61lcGGC7KRm7HSQ4EDT40YLiSWs4dEIykCft215XMAGTv_1HAXwe1qoS8NenBmUdQJyA5-H0eB7kKEc/s1600-h/russia+index+of+key+indicators.png"><img id="BLOGGER_PHOTO_ID_5281532771120966722" style="DISPLAY: block; MARGIN: 0px auto 10px; WIDTH: 320px; CURSOR: hand; HEIGHT: 186px; TEXT-ALIGN: center" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjT5xFmC-IHF5EwxurWXSotkmSZGkpL3Nh9u0YHICiwAHPZPOGSVd9xAPxxxNxrL61lcGGC7KRm7HSQ4EDT40YLiSWs4dEIykCft215XMAGTv_1HAXwe1qoS8NenBmUdQJyA5-H0eB7kKEc/s320/russia+index+of+key+indicators.png" border="0" /></a><br /><br />Another short term measure we have - industrial production, which is responsible for about 40 percent of Russian GDP - contracted at a year on year rate of 8.7 percent in November, the fastest rate since the 1998 financial collapse. As a result Russia’s Economy Minstry now forecast that the eonomy may contract in the first two quarters of next year, and full year growth of 2.4 percent in 2009.<br /><br />My feeling is that these estimates may well be too high, and that the economy may well already be contracting in Q4 2008 (in fact Deputy Economy Minister Kelpach more or less admitted that this was the case in his earlier slip of the tongue), so we could easily see an outright GDP contraction in 2009 both in real terms and, much more seriously, in nominal terms (if we hit price deflation, everything depends on how fast the authorities let the ruble devalue). A contraction in nominal GDP would be very hard for the Russian authorities to handle - since we would be into using unconventional tools in an economy where policy managers have not yet learnt to satisfactorily use conventional ones. Month on month industrial output was down 10.8%.<br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEg-Pul0RUMc7HSXiNkU-DbHZ2rjBR0c-35Sk2J21KnaOHiJ4V7rJOz7u5eRMSboDr10CxWcy8qayw-R2igm768P7cW94j8iC1crZvRdwqDje3oakE3_7bcTZM4IlwYaoM91EnLJuqWFT94p/s1600-h/russia+IP.png"><img id="BLOGGER_PHOTO_ID_5281536005228263058" style="DISPLAY: block; MARGIN: 0px auto 10px; WIDTH: 320px; CURSOR: hand; HEIGHT: 191px; TEXT-ALIGN: center" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEg-Pul0RUMc7HSXiNkU-DbHZ2rjBR0c-35Sk2J21KnaOHiJ4V7rJOz7u5eRMSboDr10CxWcy8qayw-R2igm768P7cW94j8iC1crZvRdwqDje3oakE3_7bcTZM4IlwYaoM91EnLJuqWFT94p/s320/russia+IP.png" border="0" /></a><br /><br /><br /><br />Unemployment is also rising, as are overdue wages, which were up 93% over the previous month. The unemployment rate rate rose to 6.6 percent in November, which is the highest since April, but still comparatively low by historic standards, although experts suggest we could easily see this number rise towards 10% to 11% in 2009.<br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEikR-bTAes3We1lXb-q9C86McKTWbVNkSS5HiKLafwo8pJgIuzdtUwK0C6PPrmCHmskduevEUotHgV9nwAba3gtqIhvhJ8M8WlOLZoEVqDM6iWKRCRRGQN1RvzuPWWuVoWoRqZg9LGYJjV_/s1600-h/russia+unemployment.png"><img id="BLOGGER_PHOTO_ID_5281540534976807954" style="DISPLAY: block; MARGIN: 0px auto 10px; WIDTH: 320px; CURSOR: hand; HEIGHT: 160px; TEXT-ALIGN: center" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEikR-bTAes3We1lXb-q9C86McKTWbVNkSS5HiKLafwo8pJgIuzdtUwK0C6PPrmCHmskduevEUotHgV9nwAba3gtqIhvhJ8M8WlOLZoEVqDM6iWKRCRRGQN1RvzuPWWuVoWoRqZg9LGYJjV_/s320/russia+unemployment.png" border="0" /></a><br /><br /><br />The total number of unemployed reached 5 million people, compared with 4.624 million in October, or 6.1 percent, according data from Rostat. Wages, however, are still rising at this point, and the average monthly wage rose an annual 7.2 percent in November to 17,995 rubles, while real disposable income fell 6.2 percent.<br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgGQirVEylRL2AdblG-MZPAkfUDWX8qXBY8f-5ZsZSH4xNX06iiD2DEnCV4xcZK3n1y0UyDC53hCbTRlZkhYeTQJR1rqmIInUrZftTxTozwb4kse2J273W3lhYPAyY2x4ir_nmUKJacusKa/s1600-h/russia+real+income.png"><img id="BLOGGER_PHOTO_ID_5281539577559324114" style="DISPLAY: block; MARGIN: 0px auto 10px; WIDTH: 320px; CURSOR: hand; HEIGHT: 195px; TEXT-ALIGN: center" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgGQirVEylRL2AdblG-MZPAkfUDWX8qXBY8f-5ZsZSH4xNX06iiD2DEnCV4xcZK3n1y0UyDC53hCbTRlZkhYeTQJR1rqmIInUrZftTxTozwb4kse2J273W3lhYPAyY2x4ir_nmUKJacusKa/s320/russia+real+income.png" border="0" /></a><br /><br />Russian retail sales also slowed in November and sales increased at an annual 8 percent, still quite strong, but down considerably from a revised 12.4 percent in October. Still this is the slowest pace of expansion since November 2003 and more significantly sales fell 3.4 percent from October. Retail sales have increased at an average annual rate of about 13 percent since 1998. However these have to a large extent been fuelled by unsustainable wage rises, and large scale consumer borrowing. Loans to individuals rose 58 percent in 2007, reaching 2.97 trillion rubles ($110 billion) as of 1 January 2008.<br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEg-ujAmUSn2lXJzVbPWqu9oxGukF315cJOsiGGuWyIEofQpbR1H86kNno5RL3ylBES_HDNdmhWbNPgbfhyphenhyphenOZhV5AUlKnakwGBIpUFLL-rKL9NMKvluEuJyfwDGYHh5wjq2jfaGf8wQSh1-F/s1600-h/russia+retail+sales.png"><img id="BLOGGER_PHOTO_ID_5281545794666903794" style="DISPLAY: block; MARGIN: 0px auto 10px; WIDTH: 320px; CURSOR: hand; HEIGHT: 194px; TEXT-ALIGN: center" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEg-ujAmUSn2lXJzVbPWqu9oxGukF315cJOsiGGuWyIEofQpbR1H86kNno5RL3ylBES_HDNdmhWbNPgbfhyphenhyphenOZhV5AUlKnakwGBIpUFLL-rKL9NMKvluEuJyfwDGYHh5wjq2jfaGf8wQSh1-F/s320/russia+retail+sales.png" border="0" /></a><br /><br />Capital investment has also been slowing, and growth was down to an annual 3.9 percent in November, the lowest rate since January 2005, according to the statistics office. Investments grew 6.9 percent in the previous month.<br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEi52OrtFK0_1VnjJ4Rmr7dn2Mb5bndH_BNlqg24aD7aXtZyapz0n86UoeiwY1q4kBpmCP6afdGc_LPavCB-v4GIqNUdKHCzdrOWcE4Fo1QLREgyBKYI7zu3oIZTpI7neNQoNEJ_ICqcOJ44/s1600-h/russia+capital+investment.png"><img id="BLOGGER_PHOTO_ID_5281544330349932578" style="DISPLAY: block; MARGIN: 0px auto 10px; WIDTH: 320px; CURSOR: hand; HEIGHT: 175px; TEXT-ALIGN: center" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEi52OrtFK0_1VnjJ4Rmr7dn2Mb5bndH_BNlqg24aD7aXtZyapz0n86UoeiwY1q4kBpmCP6afdGc_LPavCB-v4GIqNUdKHCzdrOWcE4Fo1QLREgyBKYI7zu3oIZTpI7neNQoNEJ_ICqcOJ44/s320/russia+capital+investment.png" border="0" /></a><br /><br />Thus an incredible trifecta - a unilateral decision to recognise Georgia's two separatist regions, a 66 percent fall in oil prices and the worst global financial crisis since the Great Depression - has concocted itself, and has lead to a sharp spike in investor unease which has provoked the withdraw of around $211 billion from Russia (estimate by analysts at PNB Paribas) since that fateful day when the tanks went though roaring through the Roki tunnel, and we now await to see just how sharp "sharp" means when we are talking about the slowdown in Russian GDP in 2009.</p>Unknownnoreply@blogger.com20tag:blogger.com,1999:blog-7303901362201842397.post-1264046362103004202008-11-19T13:43:00.026+01:002008-12-16T11:05:19.153+01:00Russia's Economic And Financial Meltdown Continues ApaceRussia's foreign-exchange reserves have been now been declining very rapidly since mid August, and as the money goes so does the faith that the large stock of reserves the country built up during the boom times would be sufficient to see them through any downturn in energy prices. As the money leaves, so it seems does the decade of economic growth and stability which they symbolised. Indeed so rapid has been the decline that Russia's international reserves, which are the third-biggest after those of China and Japan, have now fallen $161 billion, or 27% percent, since 8 August last, and decreased by $17.9 billion to $437 billion in the week to 5 December. Investors have now pulled $211 billion out of the country since August, according to estimates by BNP Paribas.<br /><br /><br /><p><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgZ8_aPwozHNBAi5gDiBVc92k84zw4KGxRrhYUCnKj_Z9aeqhyphenhyphenCMtgv5Bvf1vQOBJuEq9E0m0ctP7CDwJiLT32gFCMmxFEI9SA7mXL684u3iTEcPzetgJwkK7Rfh-wxQwr9P3HZhZfaZICk/s1600-h/russia+GDP.png"><img id="BLOGGER_PHOTO_ID_5280137028067844818" style="DISPLAY: block; MARGIN: 0px auto 10px; WIDTH: 320px; CURSOR: hand; HEIGHT: 162px; TEXT-ALIGN: center" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgZ8_aPwozHNBAi5gDiBVc92k84zw4KGxRrhYUCnKj_Z9aeqhyphenhyphenCMtgv5Bvf1vQOBJuEq9E0m0ctP7CDwJiLT32gFCMmxFEI9SA7mXL684u3iTEcPzetgJwkK7Rfh-wxQwr9P3HZhZfaZICk/s320/russia+GDP.png" border="0" /></a><br /><br /><br />But just how difficult managing this process is proving to be was illustrated yet again this morning as Russia’s central bank found itself forced to accept a further devaluation in the ruble - for what is now the second time in a only a week - subsequent to which the ruble fell as much as 1.3 percent (to a four-year low of 37.5015 per euro) as Bank Rossii widened the trading band against the basket of dollars and euros used by the bank as the measure for attempting to manage the exchange rate.<br /><br />Russia has now used some 27 percent of its reserves in these attempts to stem what has now become a 16 percent decline in the ruble following a 69 percent drop in the price of oil and last weeks decision by credit ratings agency Standard & Poor’s to cut its Russian credit rating on for the first time in nine years.<br /><br />Thus over at Bank Rossii they have been having their work cut out "fexibilising" the trading band, and it this flexibilisation process that has now allowed the ruble to fall against its target exchange rate against a basket of currencies by 8.6 percent, down further from the 7.7 percent level facilitated last week and the 3.7 percent one of a month ago. Thus the currency has now fallen a net total of 5.9 percent against the basket in the series of six "adjustments" to the trading band implemented since 11 November. However this "slow and steady" approach to devaluation is creating uncertainty, as well as fomenting a loss of confidence with Russians withdrwaing a total of 6 percent from their ruble accounts in October alone, the fastest rate of withdrawal since Bank Rossii started collecting this data two years ago, while foreign currency deposits rose 11 percent. Thus instead of reinforcing confidence in the monetary regime, the slow, step-by-step adjustment of the nominal exchange rate may be perpetuating a steady stream of deposit withdrawals and dollar purchases, and some evidence for this can be found in November's 5.9 percent contraction in the money supply.<br /><br />Apart from the financial turmoil, Russia's economy is really reeling under the weight of the sharp drop in crude prices, and the price of Urals crude, Russia's main export blend, is currently trading at around $44.13 a barrel, down 69 percent from the July peak, and well below the $70 average required to balance the country's 2009 budget.<br /><br /><strong>GDP Growth Slowing Rapidly<br /></strong><br />It is hard to get a fix at the present time on what Russia's growth rate will look like in 2009, and estimates vary widely. Deutsche Bank recently cut its Russian growth forecast to 1 percent for next year, down from an earlier 3.4 percent, while the World Bank last month forceast a slowdown to 3 percent from what has been an average expansion of 7 percent a year since 1999. At the bottom end of the forecast range we have Oleg Vyugin, chairman of MDM Bank and a former central banker, who suggests the economy may contract by as much as 4% if the prices of raw materials exports do not recover. My own feeling is that the final figure may well be much nearer to Vyugin's estimate than to the World Bank one, especially if we don't get a strong rebound in commodity prices and given the sharp contraction in non-energy industrial output.<br /><br />Analysts an OAO Sperbank have gone one step further and come up with two possible scenarios for possible impacts of the economic slump on property prices. For the first (or mild case) scenario they postulate a 2.5-3.5% growth in GDP, 11% inflation and a 30 ruble per dollar exchange rate in 2009. In this case, the bank anticipates a drop in Moscow real estate prices of 34.4% in ruble terms and 46.6% in dollars. On the second scenario GDP stagnates (or even contracts by up to 2.5%), there is higher inflation and an even larger devaluation of the ruble against the dollar. On this (worst) case scenario the Bank suggests that Moscow property prices would plummet by 38.1% in rubles and 59.6% in US dollars. You have been warned!<br /><br /><br /><strong>The Inflation Worm Is At The Heart Of The Problem<br /></strong><br /><br />The real difficulty facing Russia's macroeconomic managers is that after two years of shocking inflation domestic industry is in no position to compete with its overseas competitors while the ruble remains at its present rate, while any sharp devaluation will have a serious impact on the balance sheets of those who took advantage of cheaper interest rates available abroad to do their borrowing using forex loans. This situation is not that different from that which is to be found in many other economies across the region, in Latvia, Hungary, Ukraine and Romania (for example), with the added rider that the IMF representatives who are in dialogue with policy makers in these very fragile economies would do well to bear in mind the potential knock-on effect of any coming downward adjustment in the ruble.</p><p>In annual terms inflation is now slowing, and was down to 13.8% in November, from 14.2% in October. Still, these are very - unacceptably - high numbers, and those who so willingly acquiesced in them earlier will now feel the downside of their negligence, although unfortunately it is - as ever - the poor old Russian in the street who will really pick up the bill.<br /><br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhvh8GiZQO_UjWiohBvGGmrlhyphenhyphenCUNyr3rgOyG7XhdWEu8ocqHv0ce-ktgDKdYQt14_G01LG44NjNkaMpl-TPSZHiUNofTA943ejpEGzqjSb4_U8hKJOmqBy0F8SNpsHl_cct2eejyQVmBS2/s1600-h/russia+cpi.png"><img id="BLOGGER_PHOTO_ID_5280041992209494466" style="DISPLAY: block; MARGIN: 0px auto 10px; WIDTH: 320px; CURSOR: hand; HEIGHT: 194px; TEXT-ALIGN: center" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhvh8GiZQO_UjWiohBvGGmrlhyphenhyphenCUNyr3rgOyG7XhdWEu8ocqHv0ce-ktgDKdYQt14_G01LG44NjNkaMpl-TPSZHiUNofTA943ejpEGzqjSb4_U8hKJOmqBy0F8SNpsHl_cct2eejyQVmBS2/s320/russia+cpi.png" border="0" /></a><br />Basically, the credit driven consumer boom which accompanied the commodities one severely distorted the always delicate balance between Russia's commodities and manufacturing sectors, leaving the manufacturing sector strongly uncompetitive. It is this lack of competitiveness which now exaccerbates the severity of the downturn, just as many commentators, <a href="http://russiatooat.blogspot.com/2007/12/inflation-in-russia-two-much-money.html">including yours truly</a>, where arguing it would do. Frank Gill from Standard and Poor's puts it like this.<br /><br /></p><blockquote>Accompanied by generous government spending, the credit boom also fueled inflation, which weighed on the competitiveness of Russia's noncommodity sector. As wage growth averaged nearly 30 percent over the last two years and the ruble-denominated cost of production rose, domestic manufacturers found it very difficult to compete with cheap high-quality imports. As a consequence, entrepreneurs logically avoided manufacturing and, instead, invested in much more profitable and more import-intensive sectors, such as banking, retail and construction.<br /><br />The resulting structural imbalances were well camouflaged by the extraordinary growth in energy and other commodity prices. For six straight years, the earnings from Russian oil and commodity exports on world markets have increased much faster than the cost of imports, offsetting the less flattering volume effects. From 2003 through this year, the cumulative difference between export and import price inflation in Russia was a fairly remarkable 74 percent. This put upward pressure on the ruble, encouraging borrowers to take loans in dollars or euros at negative real interest rates, under the assumption that the ruble would appreciate indefinitely. But it also provided an important source of financing.<br />Frank Gill, director of European sovereign ratings at Standard & Poor's in London, <a href="http://www.moscowtimes.ru/article/1016/42/373149.htm">writing in the Moscow Times</a> </blockquote><p>The critical part of the overheating process was to be found in the evolution of real wages which continuously outpaced productivity growth, thus undermining competitiveness. According to Rosstat, average real wage growth in the first nine months of 2008 was 12.8 percent, down from 16.2 percent during the same period in 2007 (see chart below). Meanwhile unemployment has continued to decline, and reached 5.3 percent in the third quarter, suggesting that at that point the economic slowdown had still not reached the labour market. But this is expected to change quite dramatically now, as the credit seize up and construction slump lead to lay offs in one enterprise after another.</p><p><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiLEJY8joURO_IAQEVg-iJ4ZtL0QqBZaeIvEjZ-sOJwVltK13lt8JVSQRQphXv7LD-XAkEhVuS14kRo8xiwLy5XV9Kkv4j8bek8qU70FxqO-Ex_4fyTlzaj-vjSwVD941W3oYOD7cwfGzvr/s1600-h/rus+prod+1.png"><img id="BLOGGER_PHOTO_ID_5280033058421836034" style="DISPLAY: block; MARGIN: 0px auto 10px; WIDTH: 320px; CURSOR: hand; HEIGHT: 194px; TEXT-ALIGN: center" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiLEJY8joURO_IAQEVg-iJ4ZtL0QqBZaeIvEjZ-sOJwVltK13lt8JVSQRQphXv7LD-XAkEhVuS14kRo8xiwLy5XV9Kkv4j8bek8qU70FxqO-Ex_4fyTlzaj-vjSwVD941W3oYOD7cwfGzvr/s320/rus+prod+1.png" border="0" /></a><br />The Russian government has implemented a programme - worth about $200 billion - involving a mixture of loans, tax cuts and other measures to boost liquidity and reduce borrowing costs as the 50-stock RTS Index heads for its worst year since 1998, while the ruble denominated Micex stock index is down 64 percent since 1 August. </p><blockquote>``It's a vortex of despair,'' said Julian Rimmer, head of sales trading at UralSib Financial Corp. Russian stocks are weighed down by ``an economy rendered sclerotic by the vanishing of credit, a market paralyzed by margin calls and illiquidity, the opacity of earnings through 2009 and the ruble quivering while speculators circle''.<br /></blockquote><p>Finance Minister Alexei Kudrin has said the government has already spent 90 billion rubles ($3.3 billion) out the available total of 175 billion rubles set aside for investing in domestic stocks and bonds. VTB Group (Vnesheconombank), Russia's second-biggest bank, lent 190 billion rubles ($6.9 billion) to companies in November alone as part of the plan following the supply of 120 billion rubles to what Finance Minister Alexei Kudrin termed the "real sector" (or non financial companies) in October.</p><p><strong>FDI Drying Up?</strong></p><p>Russia's supply of foreign direct investment seems to be steadily drying up. During the first nine montsh of this year the country attracted 2.3 percent less foreign direct investment than it did in the same period in 2007 as the global credit squeeze reduced investor appetite for emerging market projects. Direct investment was running at $19.2 billion over the period, while total foreign investment, including credits and flows into securities markets, was $75.8 billion, a drop of almost 14 percent over 2007, according to the most recent data from the Federal Statistics Service. Foreign investment in stocks and bonds fell 16 percent to $1.3 billion. Foreign direct investment was at a record $27.8 billion in 2007, up 100% over 2006, and thus the fall has not been that dramatic, so far, but the numbers for the last quarter will undoubtedly be much worse than those for the earlier part of the year.<br /><br /><strong>S&P Downgrade<br /></strong><br />Russia’s long-term debt rating was lowered earlier this month - for the first time in nine years -by ratings agency Standard & Poor’s, who cited capital outflows and the “rapid depletion” of the foreign currency reserves as their justification. Russia's rating was cut one level to BBB, the second-lowest investment grade, and down from BBB+. The last time S&P downgraded Russia was in January 1999, when the country had a rating of SD (or ‘selective default’) following the government's decision to default on $40 billion of debt. Russia’s outlook remains “negative.” </p><blockquote>“The rapid depletion of reserves in order to resist a more substantive adjustment of the nominal exchange rate increases the chances of discontinuous exchange-rate movements later, at a lower level of international reserves, with even more severe consequences for the private sector,” said Frank Gill, S&P’s primary credit analyst in London, in the statement.</blockquote><br />S&P said it expected Russia’s current-account surplus to swing into a deficit equivalent to 2.6 percent of gross domestic product next year, compared with a surplus of 5 percent in 2008 due to a “sharp deterioration in the country’s terms of trade”. Russia’s GDP growth is expected to decline “sharply” in 2009, according to the agency.<br /><br />Energy, including crude oil and natural gas, accounted for 73 percent of exports to countries outside of the former Soviet Union (not counting the three Baltic states), in the first 10 months of this year, according to data from the Federal Customs Service, while the federal budget is likely to “shift into deficit” as the government implements emergency tax cuts, commodities prices remain low, and a weaker economy generates less tax revenue, according to S&P. Russia’s budget surplus amounted to 7.8 percent of GDP in the first 10 months, according to Finance Ministry data, but so sharp is the turnaround that Russia may need to use most, or even all, of the money in its two oil funds to cover the budget deficit and recapitalize banks should oil prices stay at about current levels. These funds - the National Wellbeing Fund and the Reserve Fund - held a combined $209 billion as of 1 December.<br /><br />Moody’s Investors Service also changed Russia’s rating outlook at the end of November - to stable from positive - citing their opinion that the defense of the exchange rate has been "ineffective and extremely costly for official reserves".<br /><blockquote>“Russia is now facing a perfect storm of falling commodity prices, weaker external demand, tighter credit conditions and slower real incomes growth for which no amount of currency adjustment can compensate,” Neil Shearing, an emerging-markets economist at Capital Economics Ltd. in London, said in a research note today. </blockquote><br />Russia's response to the crisis seems to be what might be termed a "process in development", with new measures being continuously announced. In one of the latest such "developments" Finance Minister Alexei Kudrin said the government is thinking of using some of the funding to buy bank mortgages and will also provide 300 billion rubles ($11 billion) to guarantee corporate loans in a bid to boost liquidity. “In order to strengthen guarantees for loans, including loans for two and three years, the state must be ready to provide 300 billion rubles,” Kudrin said in a televised broadcast on the Russian state channel Vesti-24. “If necessary we can increase this limit.” Thirty billion rubles in loans are also to be provided to large airlines like Aeroflot and Transaero, according to First Deputy Prime Minister Igor Shuvalov, while Vnesheconombank, Russia’s state-run development bank, has now requested a total of 950 billion rubles ($34 billion) in government funds. To put all this in perspective, the latest amount requested by VEB represents more than 7.5 percent of Russia’s foreign-currency reserves.<br /><br /><br /><strong>Services And Manufacturing Contraction<br /></strong><br />Russia's real economy is shrinking very rapidly under the weight of all this. Russian service industries shrank in November at the fastest rate on record, and the VTB Bank Europe Services Sector Purchasing Managers’ Index was in contraction mode for a second consecutive month (registering 37.2, a sharp acceleration in the rate of contraction from the 47.4 reading in October). On such indexes a reading of 50 is the dividing line between expansion and contraction. The contraction in service industries was “by far” the biggest since the survey began in October 2001, according to the VTB statement. “Activity, new business, employment and backlogs all registered much steeper contractions than in October.”<br /><br /><p><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjAY5bBWJ3ITE8Vo5Daop2-fxCBTEnY_mb4MbbhZVyddBb9Gkmd2xFVJaFLbE1bbBNxuqG3FdNhrE-ZLM3615c-I3nzmz-MuN273SWIAfaB1T6fSUOSnd_MHEcNgZTGv-QTWrpT2ulm_CBM/s1600-h/russia+services.png"><img id="BLOGGER_PHOTO_ID_5277753452754978466" style="DISPLAY: block; MARGIN: 0px auto 10px; WIDTH: 320px; CURSOR: hand; HEIGHT: 194px; TEXT-ALIGN: center" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjAY5bBWJ3ITE8Vo5Daop2-fxCBTEnY_mb4MbbhZVyddBb9Gkmd2xFVJaFLbE1bbBNxuqG3FdNhrE-ZLM3615c-I3nzmz-MuN273SWIAfaB1T6fSUOSnd_MHEcNgZTGv-QTWrpT2ulm_CBM/s320/russia+services.png" border="0" /></a><br /><br /><br />VTB Group’s Manufacturing Purchasing Managers’ Index also showed a decline in November, this time for the fourth consecutive month, and the index registered a record low of 39.8, even lower than that of September 1998, when Russia defaulted on $40 billion of domestic debt and sharply devalued the ruble. </p><p><br /></p><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgK9rz17eA1bKezLBjBb06T5mQ6_jkidGcfF8DbJFDih4YshAs6R3__bHf461VVq0zuJX-ebBgxxRco556LNLDLnc4ywR4qafO1KqBnhC935InqxrCuHMcQY4KMswIv4O_ZljW0erb-KBu4/s1600-h/russia+pmi.png"><img id="BLOGGER_PHOTO_ID_5277754677392674610" style="DISPLAY: block; MARGIN: 0px auto 10px; WIDTH: 320px; CURSOR: hand; HEIGHT: 195px; TEXT-ALIGN: center" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgK9rz17eA1bKezLBjBb06T5mQ6_jkidGcfF8DbJFDih4YshAs6R3__bHf461VVq0zuJX-ebBgxxRco556LNLDLnc4ywR4qafO1KqBnhC935InqxrCuHMcQY4KMswIv4O_ZljW0erb-KBu4/s320/russia+pmi.png" border="0" /></a><br />The manufacturing reading is also confirmed to some extent by the November industrial output data from Rostat, since output contracted year on year by 8.7 percent after a 0.6 percent rise in October. Production shrank for the first time since new methodology was introduced in 2003 and, again, this was the biggest decline since 1998. Manufacturing fell an annual 10.3 percent compared with growth of 0.3 percent in October. Steel pipe production dropped an annual 36.9 percent and coking coal output fell 38.7 percent. Truck and car production dropped 58.1 percent and 7.2 percent respectively. Russia’s largest steelmaker, OAO Severstal, have announced they are cutting output by half and plan to reduce spending 20 percent in 2009, while Ford Motor announced on 8 December it was closing its St. Petersburg factory between 24 December and 21 January.<br /><br /><strong>Is Russia On The Brink Of Outright Recession?<br /></strong><br />Russia may well already be in its first recession since 1998, according to what may well have been a slip of the tongue by Deputy Economy Minister Andrei Klepach while Evgeny Gavrilenkov, chief economist at Troika Dialog, estimates that the word's largest energy exporter may already be running a current account deficit. <blockquote>“The recession has already begun and, I’m afraid, it won’t end in two quarters,” Klepach said in comments made in Moscow today that were confirmed by his press secretary.<br /></blockquote><p><br />Klepach added that the economy would grow by less than the ministry’s current forecast of 6.8 percent for 2008, and that industrial output growth will slow to around 1.9 percent for the whole year.<br /><br />Gross domestic product growth dropped to 6.2 percent in the third quarter, and this was already the slowest pace in three years. Russia’s last economy fell into recession in the first quarter of 1998, and only returned to growth in the second quarter of 1999. Growth has averaged over 7 percent a year since 2000.<br /><br />As I said, Klepach's declaration may well have been a (Freudian?) slip of the tongue (or tongue twister) since he later qualified his statement, saying there had been some linguistic confusion given that the Russian words “retsessiya” (recession) and “spad” (decline, slump) “mean the same thing". "This isn’t a technical recession in the American sense.” he said - referring to the fact that a recession is often defined as two consecutive quarters of negative growth. Actually the sticklers among us will note that the two quarters negative growth rule of thumb is not in fact the US criterion (since the NBER business cycle dating committee use their own "in house" methodology, as I explain <a href="http://spaineconomy.blogspot.com/2008/12/as-spanish-unemployment-rises-sharply.html">in applying this methodology to Spain here</a>), but he may be right, and what we have on our hands may best be termed a "slump" rather than a recession, but which ever it is, of one thing I am sure: the contraction has already started.</p><p>Whatever the confusion, what Klepach did make clear is that he expected Russia’s economy to grow by only 2.6 percent year-on-year in the fourth quarter (giving total growth for the year of 6 percent) and this does seem to suggest that the economy is already contracting on a quarter on quarter basis.<br /><br />Equally worrying is the evolution in the current account deficit. The full impact of the fall in oil prices will only be noted in the trade and external current account data in the fourth quarter, when export deliveries based on the new lower oil prices will be effectd. But to this evident oil price impact we need to add the fact that the non-oil external current account deteriorated significantly in 2008 as import volumes shot up considerably faster than non-oil exports (the competitiveness problem). In the second quarter of 2008, the non-oil external current account deficit reached almost US 60 billion, and this was followed by a further USD 62 billion in the third quarter, making Russia’s balance of payments position particularly vulnerable to a continuation in the low level of oil and gas prices.<br /><br />We also need to consider the problems Russia may now have in financing any such current account deficit (remember this one one of S&Ps concerns). The World Bank estimates Russia’s external debt maturing in the third and fourth quarters of 2008 at around USD 100 billion, of which about USD 45 billion is due in the last quarter of 2008. After including on-demand deposits held by the banking sector, the total debt that requires repayment or refinancing may well exceed USD 120 billion. The external debt maturing for the entire 2009 fiscal year is slightly less, at around USD 100 billion. It is clear, however, that some sectors, especially private financial corporations, are going to face challenges in rolling-over their external debt under current conditions. Further, higher prices for debt refinancing are inevitable, and to all of this you need to add-in the sharp drop in the stock values used as loan collateral which will have resulted in sizeable margin calls on lending facilities with 1-2 year maturities. </p><p>All in all the World Bank reached the conclusion that the total debt due in the fourth quarter of 2008 could amount to about USD 60-65 billion. Even so, they concluded that systemic risk to the banking sector, while rising, remained limited due to the government’s resolve in supporting the systemically important banks and the sizable package of measures taken to date. It is hard to assess whether or not they are right in this evaluation, but in any event we are all just about to find out, so those of us who don't especially like mysteries won't have too long to wait.<br /><br /></p>Unknownnoreply@blogger.com5tag:blogger.com,1999:blog-7303901362201842397.post-16936732850273835912008-11-10T18:27:00.010+01:002008-11-12T12:14:18.500+01:00Massive Foreign Reserves Outflow Puts Russia's Ruble Trading Band Under ThreatRussia's currency reserves, the third-biggest in the world, are falling steadily as tumbling oil prices and an exodus of capital are piling the pressure on the central bank and government policymakers to accept a devaluation in the ruble. Oil prices which are now down 60% from their july peak, slowing economic growth and increasing investor concern are steadily draining Russia's foreign exchange reserves, which fell 19 percent (to $484.6 billion) in the 12 weeks through Oct. 31. This is down from $598.1 billion in the week before the invasion of Southern Ossetia.<br /><br />Russia had been using the reserves to try and contain the upward movement in the ruble was thought to present a threat to the competitiveness of exports. But resistance is now becoming increasingly difficult in the fact of a 13 percent drop against the dollar since August 1.<br /><br /><blockquote>Bank Rossii began managing the ruble's exchange rate in February 2005 against a<br />currency basket comprised of about 55 percent dollars and 45 percent euros.<br />Policy makers let it trade within a fixed range in mid-May. Since then, it has<br />dropped 2.1 percent against the basket to 30.4020. Though the central bank<br />doesn't reveal the limits of the band, BNP Paribas considers 30.40 to be its<br />weaker end. </blockquote>Evidently the main responsibility for the drop in the ruble has been a change in the relative values of the currencies in the basket, with the euro falling significantly against the dollar.<br /><br />The central bank sold a record $40 billion in October, according to Moscow-based Trust Investment Bank, while Troika Dialog, the country's oldest investment bank, have warned that the currency may fall by as much as 30 percent in the event of a devaluation.<br /><br />The logic behind any impending devaluation would not be too hard to find either. Try looking at the inflation bonfire which has been allowed to rage in Russia over the last eighteen months.<br /><br /><strong>Inflation Drops Back In October, But Is Still At 14.2%</strong><br /><br /><br />Russia's inflation rate fell to 14.2 percent, the lowest in seven months, in September as grain, legumes and gasoline prices all decreased. The rate dropped from 15 percent in September, according to data from the Moscow- based Federal Statistics Service. Prices were up 0.9 percent on the month, after rising 0.8 percent in September.<br /><br /><br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgjcIvNpN3OtCLpIE_hSQgiHSBEABcF941-ke3xoG3ovIo6rj4iGjv1goFj-YW9Dq7kVdinbrIwdd22RbsMVGtNvR9d9WMIYGMOYnEfs0UA5EET1mzSaN6kKkZpuzyH0dQOoPJfhLsnMljV/s1600-h/russia+inflation.png"><img id="BLOGGER_PHOTO_ID_5267089123031930994" style="DISPLAY: block; MARGIN: 0px auto 10px; WIDTH: 320px; CURSOR: hand; HEIGHT: 194px; TEXT-ALIGN: center" alt="" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgjcIvNpN3OtCLpIE_hSQgiHSBEABcF941-ke3xoG3ovIo6rj4iGjv1goFj-YW9Dq7kVdinbrIwdd22RbsMVGtNvR9d9WMIYGMOYnEfs0UA5EET1mzSaN6kKkZpuzyH0dQOoPJfhLsnMljV/s320/russia+inflation.png" border="0" /></a><br /><br /><br />Bank Rossii, Russia's central bank, may have to increase the "flexibility'' of the ruble exchange rate, and this will involve a "certain tendency toward weakening'' according to bank Chairman Sergey Ignatiev speaking on state television Vesti-24 last week.<br /><br />Russia may "gradually'' widen the trading band if the current account falls into a deficit next year, according to Arkady Dvorkovich, an economic adviser to President Dmitry Medvedev, recently.<br /><br />And Russia's current account, the widest measure of flows in goods and services, seems now to be inexorably headed toward just thatdeficit. Russia's trade surplus narrowed to $16.4 billion in September, from $18.5 billion in August, according to the latest data from Bank Rossii .<br /><br />Russia's benchmark 30-year government bond has fallen substantially in 2008, pushing the yield to an almost seven-year high of 12.55 percent as of Oct. 27. So far this year, the RTS Index has lost 64 percent, and is headed for its worst performance since 1998.<br /><br /><strong>And Corporate Lending Piles Up And Up</strong><br /><br />VTB Group, Russia's second-biggest lender, has lent 377 billion rubles ($14 billion) to Russian companies since the beginning of September. The state-run bank provided 120 billion rubles worth of loans in September, 229 billion rubles in October and 28 billion rubles in the first week of November. Most of the money was leant by VTB (94 billion rubles) to metals companies. This was followed by 33 billion rubles for the power industry and 32 billion rubles for retail companies. The bank increased its corporate loan portfolio to 667 billion rubles in the first 10 months of 2008, from 363 billion rubles in the same period last year, according to the bank. The bank has also increased its retail loan portfolio by 183 billion rubles, a 97 percent increase from the first 10 months of 2007.<br /><br /><strong>Russian Services Contract In October</strong><br /><br />Russia's service industries contracted in October for the first time in more than seven years as the effects of the financial crisis spread into the real economy. VTB Bank Europe's Purchasing Managers' Index of growth in services fell to 47.4 from 55.5 in September. A figure below 50 shows a contraction. <br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjyGps037TR13w9ZB1gAa4dwOoQrVHmuF6Jlw-wScMM3R330wKHHcP0EbknbCkrPpT3F9wFiHAS5Ao3QzGhcoofVvBHdJsHV-4wP6SgMvkRgd2oBIZ0nZCrXYmwi5IrUiGxqBx6shakI9g/s1600-h/russia+services+pmi.png"><img style="display:block; margin:0px auto 10px; text-align:center;cursor:pointer; cursor:hand;width: 320px; height: 194px;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjyGps037TR13w9ZB1gAa4dwOoQrVHmuF6Jlw-wScMM3R330wKHHcP0EbknbCkrPpT3F9wFiHAS5Ao3QzGhcoofVvBHdJsHV-4wP6SgMvkRgd2oBIZ0nZCrXYmwi5IrUiGxqBx6shakI9g/s320/russia+services+pmi.png" border="0" alt=""id="BLOGGER_PHOTO_ID_5267154119933852706" /></a><br /><br />If we put this chart alongside the October manufacturing PMI one, it is clear that something significant happened in October. If things continue this way we are heading straight for recession I would say.<br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhuE4pWI7eSND6DD2NOVnrGV6ubh-NQ6m-77qL_BDQZzUka0hCaBZijiUlzk1kSWnUiDQ3P7OEQgg2ATp6HY9jG2ZKFuLQaCZ0QWt-gXUf40MhGgdHgHWr508CO2eb4EpPlHpIWPrkeat9f/s1600-h/russia+pmi.png"><img style="display:block; margin:0px auto 10px; text-align:center;cursor:pointer; cursor:hand;width: 320px; height: 196px;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhuE4pWI7eSND6DD2NOVnrGV6ubh-NQ6m-77qL_BDQZzUka0hCaBZijiUlzk1kSWnUiDQ3P7OEQgg2ATp6HY9jG2ZKFuLQaCZ0QWt-gXUf40MhGgdHgHWr508CO2eb4EpPlHpIWPrkeat9f/s320/russia+pmi.png" border="0" alt=""id="BLOGGER_PHOTO_ID_5264843206873155922" /></a><br /><br /><br /><strong>Update Tuesday 11 November 2008</strong><br /><br /><br />The ruble fell this morning by the most in at least a month against the central bank's dollar-euro basket and stocks fell back as traders speculate policy makers are allowing the currency to weaken. The Micex Stock Exchange halted trading for an hour after the benchmark index sank almost 10 percent. The dollar-denominated RTS Index slipped 8.5 percent to 743.77. The ruble extended its 16 percent drop since August 1 following the statement by central bank Chairman Sergey Ignatiev (see above) that under current conditions the ruble may have a ``certain tendency toward weakening.'' <br /><br />The ruble declined 1 percent to 30.6879 versus the basket as of 1:30 p.m. in Moscow. Against the dollar, it was at 27.3040 having earlier slid by as much as 1.3 percent to 27.3975. It was 1 percent weaker against the euro at 34.8484 per euro. <br /><br /><br />In other news Fitch Ratings yesterday followed Standard & Poor's and lowered the outlook for Russia's credit rating to negative, while Bank Rossii today set a limit of 10 billion rubles ($366 million) on the amount of so-called currency swaps it offered. The swaps allow traders to bet on the exchange rate without having to sell rubles. The central bank started curbing swaps on Oct. 20 in theory to deter "speculators".<br /><br />Among the falling stocks were those of OAO Sberbank, which dropped sharply after Vedomosti reported that Russia's largest savings bank had suffered a record $3 billion of withdrawals from retail accounts in October. Sberbank, which is the biggest holder of ruble deposits, fell 3.2 rubles, or 10 percent, to 27.63 rubles on the Micex Stock Exchange. Retail clients of Russia's biggest bank withdrew 80 billion rubles ($3 billion) in October, a record amount for a single month, Vedomosti reported, citing an unidentified person familiar with the bank's accounts. Central bank Chairman Sergey Ignatiev estimated yesterday said net private capital outflows reached $50 billion in October.<br /><br /><strong>Update Wednesday 12 November</strong><br /><br /><br />Russia's central bank lifted its key policy interest rate to 12 percent from 11 percent after the market closed yesterday. The move is widely interpreted as an attempt to stem the massive outflow of funds. The central bank also widened its trading band target by 30 kopeks (1 cent) yesterday, a move which "achieved almost nothing'' and cost the best part of $7 billion of the nation's foreign-currency reserves, according to analysts at Renaissance Capital. Russia has thus joined central banks in Hungary, Iceland and Pakistan in raising interest rates to stem currency losses while the rest of the world cuts benchmark levels to try to promote lending. <br /><br /><br />The cost of protecting against a default by Russia also soared after the decisions were announced. Credit-default swaps on Russian government bonds jumped to 7.17 percent of the amount insured from 6.14 percent yesterday, according to CMA Datavision prices. The yield on its 30-year dollar bonds increased to 10.77 percent from 9.1 percent. <br /><br />The ruble fell back 1 percent yesterday, the biggest daily drop in two months.Unknownnoreply@blogger.com23tag:blogger.com,1999:blog-7303901362201842397.post-49108215422231275762008-11-04T17:32:00.008+01:002008-11-05T14:35:22.532+01:00Russian Manufacturing Contracts Again In OctoberRussian manufacturing contracted in October at the slowest pace in over two and a half years as the global financial crisis cut demand, according to the latest reading on VTB Bank Europe's Purchasing Managers' Index, which fell to 46.4 from 49.8 in September. This was the third consecutive month in which Russian industry has been contracting. A figure above 50 on these indexes indicates growth, while one below 50 means contraction. <br /><br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhuE4pWI7eSND6DD2NOVnrGV6ubh-NQ6m-77qL_BDQZzUka0hCaBZijiUlzk1kSWnUiDQ3P7OEQgg2ATp6HY9jG2ZKFuLQaCZ0QWt-gXUf40MhGgdHgHWr508CO2eb4EpPlHpIWPrkeat9f/s1600-h/russia+pmi.png"><img style="display:block; margin:0px auto 10px; text-align:center;cursor:pointer; cursor:hand;width: 320px; height: 196px;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhuE4pWI7eSND6DD2NOVnrGV6ubh-NQ6m-77qL_BDQZzUka0hCaBZijiUlzk1kSWnUiDQ3P7OEQgg2ATp6HY9jG2ZKFuLQaCZ0QWt-gXUf40MhGgdHgHWr508CO2eb4EpPlHpIWPrkeat9f/s320/russia+pmi.png" border="0" alt=""id="BLOGGER_PHOTO_ID_5264843206873155922" /></a><br /><br /><br /><strong>Banks Lose $1.6 Billion In Assets</strong><br /><br /><br /> Sberbank, VTB Group and the other Russian banks lost a total of $1.6 billion from their stock and bond holdings in September, according to an estimate from UniCredit analysts who based their estimate on central bank data. Overdue loans held by banks rose rose in September to 1.45 percent (up from 1.33 percent tin August, according to Rustam Botashev, a Moscow-based analyst for UniCredit. The central bank said on November 1 that personal deposits in Russian banks fell 1.5 percent in September as people withdrew money amid global financial turmoil. Total deposits declined to 5.89 trillion rubles ($220 billion) on October 1 from 5.98 trillion rubles on September 1<br /><br /><br /><strong>National Wellbeing Fund Continues To Rise</strong><br /><br />The total assets of Russia's combined oil funds rose 4 percent - to $197.4 billion - in October after the transfer of taxes from oil revenue, according to data from the Finance Ministry. The National Wellbeing Fund held 1.7 trillion rubles as of November 1, equivalent to $62.8 billion, while the Reserve Fund held 3.6 trillion rubles, or $134.6 billion. Russia transfers a part of its oil and gas revenue to its two oil funds, which were created after the Stabilization Fund was split in two in February 2008.<br /><br /><strong>Oil Stabilisation Fund</strong><br /><br /><strong>Reserve Fund</strong><br />AUM: $134.6 Billion <br />The Reserve Fund may, by law, only invest in foreign government bonds. <br /><br /><strong>National Welfare Fund</strong><br />$62.8 Billion<br />Initially funded with just $32 Billion starting, this fund could increase dramatically in the future if oil prices start to rise again. The fund will mostly be managed by the Russian Ministry of Finance. The fund also has the ability to lend money to Russian banks. Furthermore the Fund is intended to serve as a tool for absorbing excess liquidity, in order to try to reduce inflationary pressure as well as insulate the economy from volatility in oil & gas export prices. The fund may invest in riskier assets, such as corporate bonds and possibly, at some point, equities. <br /><br />The Russian state banks VEB and Sberbank are to get funds from the National Wealth Fund to place on deposit until 2020 as part of the recent plan to rescue the country's financial sector. The draft of the new law states that Sberbank will get a subordinated 500 billion rouble ($19.11 billion) loan at an annual interest of 8 percent and will issue a bonds to guarantee it. VEB will get the money from the National Wealth Fund at a rate of 7 percent a year and will provide loans to state bank VTB, and other banks and companies at 8 percent a year.<br /><br />In line with this decision 170 billion rubles from the Wellbeing Fund ($6.3 billion) were last week deposited with the state development bank, Vnesheconombank. Russia has pledged a total of more than $200 billion to replenish liquidity and help companies overcome what is evidently now the worst financial crisis since the 1998 default on sovereign debt. The Russian government has said it will transfer 450 billion rubles from the Wellbeing Fund to Vnesheconombank, known as VEB, at an annual interest rate of 7 percent until 2019 for providing subordinate loans to banks. A further 175 billion rubles will be transferred from the fund at the same interest rate through 2013 to support local securities. Of the money deposited with Vnesheconombank, 125 billion rubles will go toward subordinate loans and 45 billion will be invested in Russian stocks and bonds.<br /><br /><strong>Oil Production Down In October</strong><br /><br /><br />Russia's oil production continued to fall in October - dropping for the 10th consecutive month - as producers struggled with rising costs and maturing fields, bringing the world's second-biggest crude exporter closer to its first annual drop in output since 1998. Output fell 0.7 percent compared with a year earlier to 9.87 million barrels of crude a day (41.7 million metric tons a month), according to figures released by the Energy Ministry. Output in Russia's oil heartland of western Siberia is sagging as older fields mature and producers are forced into remote regions to tap deposits. Oil companies need credit lines totaling $100 billion to make investments endangered by the global financial crisis, according to the Vedomosti newspaper, which cited a letter from Deputy Prime Minister Igor Sechin to President Dmitry Medvedev.<br /><br /><strong>Ruble Falls The Most In Nearly A Decade In October</strong><br /><br /><br />The ruble suffered its biggest monthly decline against the dollar in nine and a half years in October. Investors took $72 billion out of Russia during October, and have now taken around $140 billion since early August, according to estimates by BNP Paribas, while the Micex Index dropped 30 percent and pushed the yield on the 30-year government bond to a seven-year high. <br /><br />The currency, which the central bank manages against a basket of dollars and euros, weakened 1 percent to 27.0955 per dollar last Friday, taking its decline on the month to 5.6 percent, the most since March 1999.<br /><br />Bank Rossii, the central bank, buys and sells foreign- currency reserves to keep the ruble within a trading band against the basket. The mechanism comprises about 55 percent dollars and 45 percent euros and is used to protect the competitiveness of Russian exports from currency swings. The ruble fell 0.2 percent to 30.4036 versus the basket, from 30.3512 yesterday, and was little changed from 30.3675 at the end of September. <br /><br />Bank Rossii - the Russian central bank - sold $40 billion in October, a record, to prevent the ruble from weakening beyond 30.40 to the basket. During the third week in October alone Russia's reserves dropped by $31 billion (another record) according to data from the central bank.Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-7303901362201842397.post-72714051337661539122008-10-27T11:40:00.003+01:002008-10-27T11:57:39.094+01:00Moscow's Bourses Closed Again On MondayWell, this is hardly news anymore, but Moscow's stock markets were closed again this morning. The news will obviously be in future when they are open. Russia's Micex Stock Exchange and RTS suspended trading this morning because their "technical indexes'' a measure of aggregate stock prices, fell more than 10 percent on opening. <br /><br />Russian global depositary receipts plunged in London trading following the decision, led by steelmakers. The FTSE Russia IOB Index, a measure of Russian depositary receipts trading in London, sank 11 percent to 312.83 at 9:36 a.m. in London, the lowest in almost five years. OAO Severstal, Russia's biggest steelmaker, fell 23 percent to $2.50. Evraz Group SA, the second-largest steelmaker, dropped 15 percent to $10.60, or 92 percent below its May 16 high.<br /><br /><strong>The Ruble Slides</strong><br /><br /><br />The ruble fell to an 18-month low against the dollar this morning even while it strengthened for a second straight day versus an ever weaker euro. <br /><br />The currency, which policy makers manage against a dollar- euro basket in an attempt to protect the competitiveness of exporters, fell as much as 0.6 percent to 27.3738 per dollar, the weakest since April 2006. It was at 27.3624 by 11:01 a.m. in Moscow, from 27.1991 late on Oct. 24. The ruble jumped 0.9 percent to 34.0292 per euro, the strongest in almost two years. <br /><br />Bank Rossii, Russia's central bank, buys and sells foreign currency reserves to keep the ruble within a trading band against the basket. The basket rate is calculated by multiplying the ruble's rate to the dollar by 0.55, the euro rate by 0.45, then adding them together. Russia's currency was little changed at 30.3757 against the basket, from 30.4096 at the end of last week, when it strengthened just 0.1 percent. The 30.40 level is regarded by most analysts as the weakest end of the central bank's trading band. Bank Rossii sold almost $11 billion supporting the ruble against the basket last week, according to estimates by Moscow's MDM Bank. <br /><br />Crude oil, Russia's biggest export earner, fell for a second day, extending its decline from a July 11 record of $142.27 to 57 percent. Urals crude, the nation's main export blend, slid 10 percent last week to $59.93, below the $70 average.Unknownnoreply@blogger.com8tag:blogger.com,1999:blog-7303901362201842397.post-69500253182939736402008-10-22T13:38:00.009+02:002008-10-24T13:25:52.668+02:00As S&P Cut The Credit Rating, Russia's Crisis Wends On Down Its Long Winding Road<div>Russia's long-term sovereign credit rating outlook was lowered yesterday (Thursday) - to negative - by Standard & Poor's Ratings Services due to their assessment that the cost of the government's "bank rescue operation'' may increase. S&P cut their outlook from stable, a move which reflects the increased probability of a downgrade at some point in the future. Russia has committed as much as 15 percent of gross domestic product in budgetary and reserve funds to maintain banking liquidity, according to calculations made by the rating agency. At the same time S&P affirmed Russia's BBB+ long-term foreign currency and the A- long-term local currency ratings and the short-term ratings of A-2.<br /><br /></div><br /><blockquote>``We expect Russian corporate and financial sector default rates to increase as<br />debtors' access to official funds will vary,'' S&P said in the statement.<br />``Other uncertainties remain regarding what the economic policy response will be<br />to weakening growth, and whether the ongoing concentration of the financial<br />system in state hands is permanent or temporary.'' </blockquote><br /><div>Russia's reserves fell $14.9 billion last week to $515.7 billion according to the latest data from the central bank. This was the third straight week of decline, and the fall comes after the central bank sold foreign currency to prop up the ruble. Obviously there are plenty of reserves left, but this is down from around $550 billion in August, so it can't go on forever, either. The ruble weakened yesterday by as much as 0.5 percent to hit 27.0664 to the dollar at one point, the lowest since July 2006. It later rebounded and was 0.1 percent lower on the day at 26.9538 at the close in Moscow.<br /><br />Russian government bonds fell, with the yield on the 7.5 percent bond due 2030 rising 8 basis points to 10.94 percent, the highest for more than six years. The 12.75 percent bond maturing 2028 yielded 10.56 percent, up 84 basis points to a six-year high. The yield on the 11 percent bond due 2018 jumped 93 points to 8 percent, the most since 2004. </div><br /><div> </div><br /><div><strong>Micex Closes Again</strong><br /></div><br /><div>Russia's Micex Stock Exchange slid again today, and suspended trading at 2:10 p.m. until next week. The next session will start on October 28, but with the Russian bourses now closed almost as often as they are open, it is hard to be sure about anything at this point. The so-called technical index fell more than 10 percent, triggering the halt, according to information available on the stock exchange Web site. </div><br /><div> </div><br /><div>Russian stocks dropped for a third day, led by banks, on concern the turmoil in the country's equity markets is spreading to bonds and the ruble. OAO Sperbank, Russia's largestest bank, slid 15 percent and VTB Group, the second-largest, dropped 3.9 percent following a decline in Asian financial stocks. OAO Rosneft tumbled 9.4 percent as oil fell.<br /><br />Crude dropped 1.7 percent to $69.68 a barrel in New York trading yesterday, after slumping 4.5 percent on Wednesday. Urals crude, Russia's export blend, fell 4.3 percent to $66.16 a barrel. Urals needs to average $70 a barrel next year for the country's budget to balance, according to the Finance Ministry. </div><br /><div> </div><br /><strong>Aid For The Crisis Hit Property Sector</strong><br /><br />Russia's government will decide "within days'' on how to help developers and reassure banks on loans for the building industry during an economic slowdown, according to Arkady Dvorkovich, an economic aide to President Dmitry Medvedev. Construction, agriculture, machine-tools building and retail are the non-financial industries the government plans to boost, along with small businesses across the economy.<br /><br />Dvorkovich told reporters that the Russian government is discussing two possible mechanisms to help reassure banks vis a vis their lending to construction companies.<br /><br />The government may offer to buy unsold apartments at a fixed price in residential buildings that are still under construction, once the buildings are completed. Another possibility is that the OAO Agency for Housing Mortgage Lending, the state-run mortgage agency, will refinance loans once construction of a residential building is completed.<br /><br />Finance Minister Alexei Kudrin said earlier in the week that Russia's "overheated'' construction industry is facing difficult times,. Bank loans to construction companies increased 80 percent last year, compared with a 64 percent increase in borrowing for real-estate purchases, a sign that developers are over-building, according to Kudrin.<br /><br />Soyuzcement, an industry group, have reported that cement producers are reducing plans for new factories as the credit crunch derails construction projects, while companies in industrial and services sectors right across the Russian economy are cutting back on jobs and investments.<br /><br /><br /><br />Russia plans to establish a margin of spare oil production capacity as an alternative to cutting output, in order to indirectly influence prices according to Deputy Prime Minister Igor Sechin. He said Russia would not be joining in the OPEC cut back and argued that maintaining extra output capacity may allow Russia to produce oil ``at a volume that would allow more effective price parameters to be reached, ". According to Sechin "Oil has become more of a financial instrument than a commodity.''<br /><br /><br />Russian state revenue will more than likely fall sharply as the price of oil, the country's biggest export, plunges and capital flight accelerates on concern the global economy will enter a recession.<br /><br />Russian companies and banks have applied for almost $100 billion of loans from state development bank Vnesheconombank to refinance foreign debt after credit markets worldwide seized up, threatening economic growth. Banks have asked for $64 billion, while companies have requested $33 billion, according to bank Chairman Vladimir Dmitriev. The bank's supervisory board plans to review the first 10 projects, from commodities and manufacturing companies, "in the near future". Prime Minister Vladimir Putin is chairman of the bank board.<br /><br />Russia's government allocated $50 billion to Vnesheconombank, or VEB, as part of a more than $200 billion package to stem the country's worst financial crisis since 1998. Companies can apply for loans of between $100 million and $2.5 billion, Dmitriev said Oct. 13. Vnesheconombank will receive rescue funds after reviewing applications, Dmitriev said today.<br /><br /><br />Russian companies may default on almost a third of local-currency bonds as soaring borrowing costs make it "impossible'' to refinance the debt, according to Denis Gaevski, head of capital markets at Bank of Moscow, which the third-biggest arranger of ruble bonds. Companies may default on between 20 and 30 percent of the bonds, with retailers particularly vulnerable, he said.<br /><br />Russian companies are estimated to have sold 406 billion rubles ($15.2 billion) of bonds this year, with almost all of the sales taking place before August, when Russia's invasion of Georgia triggered an investor exodus during which around $63 billion have left the country, according to a UniCredit estimate.<br /><br />The average price of ruble-denominated corporate debt dropped to an all-time low of 86 percent of face value on Wednesday, from more than 100 percent in June, according to the MICEXCBI index of bonds traded on Moscow's Micex Stock Exchange. Bonds payable in 2009 by Moscow-based property developer Mirax Group traded for as little as 30 percent earlier this month, and were priced at 54 percent of face value in the middle of this week.<br /><br />The average interest rate Russian banks charge to lend money to each other overnight - the so called MosPrime rate - oreached a record 21 percent last week, but was back down to 7.67 percent yesterday.<br /><br /><br />Slumping commodities prices, the war with Georgia and the seizing up of global capital markets prompted investors to pull money out of Russia, despite the best efforst of the Russian government to restore confidence and to inject money into the system to brake the slowdown. Last month the Russian government has pledged more than $200 billion for banks and companies to stem the worst financial crisis since 1998.Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-7303901362201842397.post-91041164933224400922008-10-07T08:45:00.008+02:002008-10-07T17:42:11.757+02:00Russia's Crisis Gathers MomentumRussia's government plans to lend the country's biggest banks 950 billion rubles ($36 billion) for at least five years in an attempt to unfreeze credit markets, according to a new plan announced by President Dmitry Medvedev this morning. State-run OAO Sberbank and VTB Group, will get 500 billion rubles and 200 billion rubles respectively.<br /><br />Some 450 billion roubles ($17.19 billion) of the 950 billion rouble subordinate loans package for banks will come from one of the National Wealth Funds according to Finance Minister Alexei Kudrin said on Tuesday. Russia's two oil wealth funds totalled $189.7 billion as of Oct. 1.<br /><br /><br />The Russian authorities, who are currently grappling with the worst financial crisis since the government's debt default in 1998, have already pledged more than $150 billion for banks and companies through loans and tax benefits (see <a href="http://russiatooat.blogspot.com/2008/09/is-russia-just-another-emerging-economy.html">details in this post here</a>).<br /><br /><br /><strong>Stocks First Rise And Then Fall Back<br /></strong><br />Russian stocks rose following the announcement, and with OAO Sberbank and VTB Group leading the advance. OAO Rosneft, Russia's biggest oil producer, pared back some of yesterday's 24 percent decline after crude rose in New York. The Micex Index initially gained 5.7 percent to 794.48 at 2:12 p.m. in Moscow, after falling 19 percent yesterday. The dollar- denominated RTS Index climbed 4 percent to 900.60 after retreating 19 percent yesterday, the biggest slump since the index began in 1995.<br /><br />However the good news was not to last long, and it seems the plan wasn't enough to convince investors the government can halt its worst financial crisis since 1998. On the day the Micex Index fell 4.5 percent to 717.83, after losing 19 percent yesterday, and closed at its lowest level since August 2005.<br /><br />Share trading on Russia's bourses had earlier been suspended for a second day first thing this morning following yesterday's massive sell off. Russia's stock markets have now been halted nine times since Sept. 16. One indication of just how critical the situation is becoming is the fact that the MosPrime interbank rate - that is the rate that Russian banks charge to lend to each other - soared to 7.29 percent today from 4.75 percent at the end of last week.<br /><br />Russia's oil and gas majors were all down, with Gazprom sinking 4.9 percent to 136.10 rubles. Rosneft falling 6.6 percent to 101.87 rubles, and Lukoil declining 5.3 percent to 1,047.90 rubles.<br /><br />The price of oil, which has slipped 38 percent from a record $147.27 a barrel July 11, snapped a four-day decline this morning, rising 3 percent to $90.47 a barrel, and all the majors seem to have applied to the government for help with loans. Lukoil is seeking between $2 billion and $5 billion to refinance loans, but many other companies are also reported to be seeking government loans, including OAO Gazprom, OAO Rosneft, and TNK-BP, BP Plc's 50 percent Russian venture.<br /><br /><br /><strong>Fence Mending</strong><br /><br />Russia is urgently seeking to mend fences with the west after the damage done by the conflict in Georgia, amid fears that the country faces a suuden slowdwon followed by an extended period of stag­flation.<br /><br />According to Igor Yurgens - former vice-president and executive secretary of the Russian Union of Industrialists & Entrepreneurs, and currently an adviser to Dmitry Medvedev - the Russian administration are trying their best to send signals of an improved business climate as Russia battles to restore investor confidence, which he recognises have been badly shaken by the cold war style rhetoric of recent weeks .<br /><br /><br />According to Yurgens - as <a href="http://www.ft.com/cms/s/0/3cc17a2c-93d9-11dd-b277-0000779fd18c.html">quoted by the Financial Times</a> this morning - both Dmitry Medvedev and Vladimir Putin understand the government needs to improve the climate for foreign and, mainly, Russian investors “who are sort of scared”. “A big financial crunch outside and a crisis of confidence and cold-warish kind of attitude inside was too much.”<br /><br />Mr Yurgens told the FT that a slowdown in growth because “credit lines are closed” was inevitable with a fall of as much as 4 percentage points in GDP growth from the current 8 percent level. This provisional estimate of the growth rate at the end of 2008 seems realistic to me.<br /><br />The head of a think tank advising the president, Igor Yurgens was pretty much a lone voice criticising Vladimir Putin this summer for his attack on Mechel, a coal and steel group, and his comments at the time was one of the factors which helped trigger the investor exodus due to concern over political risks.<br /><br />The government’s reining in of its rhetoric “is visible and is being substantiated by some megadeals in the pipeline and signed, such as Eon Ruhrgas”, he said, referring to last week’s deal between Eon and Gazprom.<br /><br />“You could feel a little bit of discontent with the hawkish rhetoric and you see the adjustment,” he said, adding that Mr Medvedev hoped to push ahead with cutting back bureaucracy and stimulating growth in the oil ­sector via tax incentives. I guess we can consider <a href="http://www.bloomberg.com/apps/news?pid=newsarchive&sid=azotRtS9KH8M">this mornings reported decision</a> of the Russian authorities to extend a 4 billion-euro ($5.43 billion) loan to Iceland to be the kind of pacificatory measure Yurgens has in mind.<br /><br /><br />Meanwhile Andrei Sharonov, managing director of Troika Dialog, the Russia's oldest investment bank, <a href="http://www.bloomberg.com/apps/news?pid=newsarchive&sid=auIlVCEgcnDQ">warned yesterday</a> that the country was "quite vulnerable" to the global credit crisis and with retailers and developers being particularly at risk, while Bloomberg cite Gulzhan Moldazhanova, chief executive officer of Basic Element, the investment group of Russia's richest man, Oleg Deripaska, to the effect that Russian retailers are currently being offered credit with an interest rate of up to 35 percent.<br /><br /><br /><blockquote>``There are two main consequences for Russia, a lack of confidence and a lack of liquidity,'' Sharonov, a deputy economy minister until resigning in July last year, said in a Bloomberg Television interview in Moscow. ``This problem is not only for financial institutions, but for the whole of industry, for the whole economy. Many companies feel these problems with debt financing.'' </blockquote><br /><br /><br />Russia's ruble fell for the eighth consecutive day yesterday, and hit its weakest level in 18 months against the dollar at 26.2043. The extra yield investors demand to own developing-nation bonds instead of U.S. Treasuries swelled 48 basis points, or 0.48 percentage point, to a four-year high of 4.85 percentage points, according to the JPMorgan Chase & Co EMBI+ index.<br /><br />The cost of protecting bonds sold by Russia's government jumped the most in three weeks, rising 26 basis points to 290, according to CMA Datavision in London. Credit default swaps on Ukrainian government debt also soared 57 basis points to 900, the highest among Europe's emerging markets, CMA prices show.<br /><br /><br /><br /><br /><strong>Disclosure Statement</strong>: Edward Hugh is a macroeconomist who maintains a premier set of blogs at <a href="http://globaleconomydoesmatter.blogspot.com/index.html" target="_blank">Global Economy Matters</a> and is a featured analyst at <a href="http://www.emerginvest.com/" target="_blank">Emerginvest</a>. Edward Hugh provides non-partisan information about world stock markets, and does not have any holdings in foreign equities. The information stated above should not be construed as investment advice, and Edward Hugh is not liable for any actions taken on said materials.Unknownnoreply@blogger.com1tag:blogger.com,1999:blog-7303901362201842397.post-17743888187158636322008-10-03T11:31:00.004+02:002008-10-03T23:02:28.890+02:00Russia's Services Expansion Continues In SeptemberRussian service industries continue to expand, and they even did so at a slightly more rapid pace in September than in August. Evidently confidence has yet to feel the impact of recent financial developments, at least that is the conclusion which can be drawn from the latest VTB Bank Europe Purchasing Managers' Index report. According to the VTB survey growth in services rose to 55.5 from 55.4 in August. Nonetheless this was the third-lowest reading since the survey started in 2001. <br /><br /><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhT6C3K-ai1P3s456ZV5HkvsQYotDHin-KlTMOoCYTBlurlVvVBpfCBF3k4tmAIP7j8zJYf7mKD3cMBiSispOXE1M0eOfjNIrfDtfNwI-G5_rA5fOSZTl0TkoZSoWjfqhdpTuaXD8LBwgb5/s1600-h/russia+services+PMI.png"><img style="display:block; margin:0px auto 10px; text-align:center;cursor:pointer; cursor:hand;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhT6C3K-ai1P3s456ZV5HkvsQYotDHin-KlTMOoCYTBlurlVvVBpfCBF3k4tmAIP7j8zJYf7mKD3cMBiSispOXE1M0eOfjNIrfDtfNwI-G5_rA5fOSZTl0TkoZSoWjfqhdpTuaXD8LBwgb5/s320/russia+services+PMI.png" border="0" alt=""id="BLOGGER_PHOTO_ID_5252858595216431890" /></a><br /><br />It is clear that the Russian services sector - and especially the financial services and real estate components - is going to slow more, and probably considerably more, and that end of year GDP growth will be down on the kind of levels we have been seeing over the last 18 months or so. How much down? I will need to see some more data from the real economy to get a "fix" on that I think. Just remember, patience IS a virtue, and better a later result than a more rapid one which is completely worthless. Mark to market, but in due course and not before.<br /><br /><br /><strong>RTS Index Has Worst Week In Nine Years</strong><br /><br /><br />Russia's RTS Index had its worst week in nine years this week, forcing the exchange to halt trading yet one more time, as the biggest slump in commodity prices in a half century sent raw-material producers lower. OAO GMK Norilsk Nickel, Russia's biggest mining company, had a record loss on the Micex after saying first-half profit sank 33 percent. OAO Gazprom dropped the most since Sept. 16. <br /><br />The dollar-denominated RTS plunged 7.1 percent to 1,070.98, bringing its weekly drop to 17 percent, the biggest since 1999. Trading was halted three times this week on the RTS exchange, Russia's second-biggest bourse, because of stock declines. The ruble-denominated Micex Index lost 5.3 percent to 924.55 today. <br /><br />Commodities, as measured by the Reuters/Jefferies CRB Index of 19 raw materials, have tumbled 10 percent this week, the most since at least 1956. Crude oil has fallen 11 percent so far this week on declining U.S. demand and economic growth concerns. <br /><br />Norilsk Nickel plunged 18 percent to 2,757.57 rubles, its biggest decline since listing on the Micex last year. The world's largest producer of refined nickel said first-half profit fell to $2.7 billion from $4 billion a year earlier on lower nickel prices and higher costs. OAO Uralkali, Russia's second-biggest potash producer, sank 8.2 percent to 117.83 rubles after dropping 11 percent yesterday.Unknownnoreply@blogger.com0